UPS CEO sees $15 billion annual revenue opportunity from data center boom

LOS ANGELES, Oct 27 : UPS CEO Carol Tome told Reuters on Tuesday the AI data center boom is a decades-long opportunity for the world's largest parcel delivery and logistics company, which aims to boost profits by handling fewer, but more premium, shipments.  

Global data center spending is estimated to hit roughly $1 trillion ​in 2026 and more than double before the end of the decade as tech giants like Alphabet, Microsoft, Meta and Amazon invest billions of dollars in artificial intelligence facilities, which require significant new ​electricity infrastructure to power and cool servers and computer chips. 

The logistics opportunity associated with data centers is $15 billion per year, said Tome. 

"It is from manufacturing floor to front door," she said. UPS is flying in critical components such as advanced microprocessors, arranging ocean shipments for equipment of all shapes and sizes, warehousing goods and delivering parts to project sites.

Tome spoke after UPS raised its annual revenue and profit forecasts on better-than-expected third-quarter earnings.

Data center projects have become divisive as communities weigh job creation and economic growth against electricity prices, water use and noise. Investors separately are questioning companies' massive investments in them. Nevertheless, there are many projects underway and once those are built, there will continue to be demand for parts and equipment to keep them running, Tome said.

"This is something that's going to be decades," Tome said of demand.

While UPS data center revenue is growing quickly, it has not yet matched revenue from its healthcare segment, which hit $3 billion in the latest quarter, Tome said, declining to give a figure for the newer business.

INFLECTION POINT

As part of Tome's "better, not bigger" growth strategy, UPS has been reconfiguring its network to be smaller, nimbler and more profitable. 

It has consolidated facilities to reduce costs and improved service quality by investing in things like temperature sensors as well as package scanning and tracking.

It also has focused on high-growth and high-margin segments like healthcare, returns and, most recently, data centers.  

UPS has made significant headway in specialized healthcare logistics, shipping temperature-controlled chemotherapy drugs, cancer treatments and direct-to-consumer GLP-1 weight-loss drugs. It is now the largest player in the $148 billion global healthcare market after some key acquisitions and internal growth.   

That business generated revenue of $6 billion for UPS in 2020 and is forecast to reach $13 billion in revenue this year, Tome said.  

UPS is racing rival FedEx for the same high-margin volume as they each wean off low-margin to unprofitable deliveries of online purchases and other goods. FedEx, which has set up a dedicated team to court data center-related business, will report quarterly results after the market close on Wednesday.

Meanwhile, retailers like Amazon.com  and Walmart as well as growing rivals like OnTrac are aggressively targeting domestic shipments in certain parts of the country. Some of that includes volume UPS and FedEx don't want. 

UPS has cut doorstep deliveries of millions of packages for Amazon that it considered unprofitable, which helped lift its margin. Tome said the margin would keep improving every year.

"We've moved through an important inflection point," Tome said.