Dear Investor
During the month, the ELMRI ANZ Conviction Fund rose 4.4 percent and the ELMRI Global Fund gained 11.7 percent, outperforming their respective benchmarks in a month that saw a strong recovery in technology and AI related equities.
April was characterised by a constructive US reporting season, with many companies exceeding consensus expectations, and further evidence that artificial intelligence demand remains constrained by available supply rather than by end market appetite.
In Australia and New Zealand, the recovery was more selective. While parts of technology and healthcare remained soft, the domestic market is beginning to see the second order effects of the global AI buildout, particularly through data centres, electrical infrastructure and engineering businesses exposed to capacity expansion. This remains earlier stage than in the United States, but the direction of travel is becoming increasingly clear.
Market Backdrop
US equities recovered strongly through April, led by large cap technology and AI beneficiaries. The S&P 500 and Nasdaq both rebounded as investors responded positively to resilient earnings and growing signs that AI related capital expenditure is beginning to produce tangible revenue growth, backlog expansion and margin improvement across the major cloud platforms.
The latest reporting season suggests that the AI investment cycle is broadening rather than narrowing. What began as a semiconductor led theme is now flowing across memory, networking, power generation, electrical equipment and data centre infrastructure, as hyperscalers continue to expand capacity in response to customer demand they are still struggling to meet.
In data centres, the scale of hyperscale and AI related demand is increasingly visible in Australia. CDC Data Centres, 49.7% owned by Infratil, announced a 555 megawatt contract with a "high grade United States customer” (likely a major hyperscaler), described as the largest data centre agreement in Australia’s history and equivalent to around 40% of all operating Australian data centre capacity in 2025. The long term contract takes CDC’s contracted capacity beyond 1 gigawatt and is expected to support EBITDAF of more than A$1 billion by FY28, highlighting how global AI workloads are beginning to anchor substantial infrastructure investment in the region.
In Australia, sector performance was more dispersed. Technology was the strongest area of the market, supported by data centre, infrastructure and selected software exposures linked to accelerating AI hardware demand, while healthcare lagged. This widening gap in sector returns reflects a market that is increasingly rewarding businesses with direct exposure to AI infrastructure and power demand, while remaining more cautious on areas where earnings momentum is less immediate.
The domestic macro backdrop also shifted modestly in early May, with the Reserve Bank of Australia lifting the cash rate by 25 basis points to 4.35%. The move followed stronger inflation data, including a March quarter CPI reading that showed price pressures reaccelerating, reinforcing the RBA’s view that inflation is likely to remain above target for longer. While higher rates can weigh on valuation multiples, the more important driver of share price performance in April remained company specific earnings delivery and exposure to structural AI demand.
Return on AI Capital Investment
There are now clear signs that the investments being made in building out the AI infrastructure is beginning to translate into visible financial returns. Google Cloud revenue grew more than 60% year on year in the March quarter, with operating margins expanding to ~33% and backlog growing to more than US$460 billion, just over half of which is expected to convert to revenue within the next two years. Amazon Web Services (AWS) delivered 28% year on year revenue growth, its fastest pace in several years, with operating margins 37.7% and a backlog of around US$364 billion. Microsoft reported close to 30% growth in Intelligent Cloud revenue and around 40% growth in Azure, with cloud gross profit continuing to rise even as AI infrastructure investment steps up.
Together, these datapoints suggest that the major cloud platforms are beginning to earn tangible returns on the large capital investments made over the past two years. Revenue growth is reaccelerating, order books remain substantial and margins are improving or holding up well despite heavy ongoing investment. This is important as it suggests the current AI capex cycle is being underpinned not only by strategic urgency, but increasingly by attractive unit economics and long duration customer demand.
We are cognisant of concerns that some of the reported margin improvement at the major cloud platforms reflects depreciation changes rather than purely underlying economics. Adjustments such as extending the useful life of servers and networking equipment have clearly reduced depreciation expense and provided a near term accounting tailwind. In absolute terms these changes are material, lowering reported expenses by several billion dollars a year for some platforms, but they remain modest relative to the broader uplift in cloud gross profit and operating income now being driven by accelerating AI and cloud revenues. In our view, the more important drivers of margin improvement are genuine operating leverage and technical efficiencies, including the increased use of custom silicon, higher utilisation and more efficient inference, which allow revenue to scale faster than fixed infrastructure costs.
AI Infrastructure and Power
The strength in AI demand is now flowing well beyond the cloud platforms themselves and into the broader AI infrastructure ecosystem. The most direct beneficiaries are data centre owners and operators such as CDC, NextDC and Goodman Group, where long dated contracts and rapidly expanding contracted utilisation are translating into visible growth in backlogs, capital plans and future earnings. The combination of CDC’s record 555 megawatt contract and NextDC’s recent step up in contracted utilisation illustrates how quickly high quality capacity in Australia and New Zealand is being absorbed as global AI workloads scale.
A second group of beneficiaries are the engineering and infrastructure businesses that will be required to deliver both the data centres and the renewable energy and grid upgrades needed to power them. Companies involved in electrical, civil and mechanical works, high voltage connections, transmission and grid scale renewables should see a growing volume of work over coming years as data centre load and the associated need for new generation, storage and transmission continue to rise. This is already starting to appear in order books and revenue growth for selected engineering names in the ANZ portfolio.
Finally, on site power and storage providers are emerging as critical enablers of this buildout. Bloom Energy provides modular, on site generation that allows data centres to secure reliable power even where the grid is constrained, while battery and storage suppliers such as CATL and related ecosystem players are central to smoothing the intermittency of renewable generation and supporting higher utilisation of existing grid assets. Together, these exposures position the portfolios to benefit not only from the digital side of AI adoption, but also from the substantial investment required in the physical infrastructure and power systems that underpin it.
Company Spotlight – Bloom Energy (NYSE: BE)
Bloom Energy provides distributed power generation solutions, increasingly focused on data centre and mission critical applications where grid power is either constrained or insufficiently reliable. This positioning is becoming more valuable as AI workloads intensify electricity demand and grid bottlenecks delay new data centre capacity.
In late April, Bloom reported very strong first quarter 2026 results and raised its full year outlook. Revenue grew 130% year on year to US$751.1 million, while the company delivered positive GAAP net income of US$70.7 million and continued margin improvement. Management also lifted full year 2026 guidance, now expecting revenue of US$3.4 billion to US$3.8 billion and non GAAP gross margin of around 34%.
From an investment perspective, the result underlines that Bloom is now participating directly in the structural power constraints created by AI and data centre growth. As more developments are delayed or constrained by grid connection timelines, the value of flexible, modular generation increases, and Bloom appears increasingly well placed to benefit from this shif
Company Spotlight – NextDC (ASX: NXT)
NextDC is one of Australia’s leading independent data centre operators and is increasingly leveraged to the growth in hyperscale cloud, AI infrastructure and enterprise demand for secure, high power capacity.
In April, NextDC announced a material step up in contracted utilisation, which increased to 667 megawatts, alongside strong growth in its forward order book. This points to a substantial uplift in future billing utilisation as new capacity is delivered over coming years, providing increased confidence in the company’s long term revenue and earnings trajectory.
To support this growth, the company also announced a large capital raise and increased investment plans to accelerate the rollout of new capacity, particularly at its Sydney facilities. While the equity raising was dilutive in the near term, it should help ensure that the company can capture the significant demand opportunity now emerging across the Australian data centre market, while potentially opening the door to lower cost sources of funding over time.
Conclusion
The dominant market narrative remains the AI infrastructure buildout and the associated need for power and grid investment, much of it underpinned by renewable and sustainable energy. Microsoft, Alphabet and Amazon are already seeing returns on their AI investment through accelerating revenue growth, and each has noted that greater compute capacity would have supported even stronger growth.
At the same time, the disconnect between operating performance and share price behaviour in software and healthcare has become more pronounced. Many of our holdings in these sectors continue to deliver resilient revenue growth, strong margins and, in some cases, upgraded guidance. Yet share prices remain under pressure as markets focus on AI disruption, near-term margin noise and geopolitical headlines.
Amidst the volatility, we continue to focus on a concentrated portfolio of businesses with strong balance sheets, durable competitive advantages and clear exposure to long-term structural growth, rather than attempting to trade short-term shifts in market narrative. Market leadership can change quickly as attention moves between geopolitics, earnings and macro data, but the value creation in our core holdings is driven by fundamentals that play out over years, not weeks.
Our focus remains on owning and adding to high-conviction positions when volatility creates opportunity, and on staying patient as the earnings power of these businesses is reflected in valuations over time.
We thank you for your continued support and trust in ELM Responsible Investments.
Kind regards,
Jai Mirchandani
Founder, CIO and Portfolio Manager
ELM Responsible Investments
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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Past performance is for illustrative purposes only and is not indicative of future performance.