Gap's Struggles vs. AI Energy's Future: Where to Bet in 2025

The retail sector faces headwinds, epitomized by The Gap, Inc.'s (GAP) tariff-driven margin pressures and brand-specific execution challenges. Meanwhile, AI-driven energy infrastructure plays—from nuclear power to data center builders—are emerging as structural winners, fueled by surging computational demand and geopolitical onshoring trends. For investors, the choice is stark: stick with a cyclical retailer battling near-term headwinds or pivot to industries positioned to dominate the energy transition and AI revolution. Here's why the latter offers better long-term returns.

The Gap: Near-Term Headwinds Amid Cyclical Weakness

The Gap's Q1 2025 earnings underscore a retailer grappling with systemic challenges. Tariffs on imports, now accounting for $250–300 million in annual costs, are squeezing margins despite supply chain diversification. While the company has shifted sourcing from China (now 3% of its mix) to Vietnam and Indonesia, these regions still face trade barriers. The reflects this strain, with shares down over 30% in the past year as investors price in margin pressures.

Operational rigor has mitigated some risks: inventory management improved, and operating margins expanded to 7.5%, aided by cost controls. However, brand-specific issues loom large. Athleta's sales dropped 6%, while Banana Republic struggles to regain relevance. These underperforming brands require sustained reinvestment, diverting capital from growth initiatives. The shows cash reserves at $2.2 billion—comfortable for liquidity but insufficient to transform its core challenges.

AI-Driven Energy Infrastructure: Long-Term Growth Anchored in Structural Trends

While Gap battles cyclical retail dynamics, AI's energy demands are creating a multi-decade tailwind for infrastructure plays. Data centers, which power AI models, now consume 4.4% of U.S. electricity—a figure projected to hit 12% by 2028. This surge is driving investment in grid modernization, renewables, and advanced cooling technologies.

1. Nuclear and EPC Firms: The Quiet Infrastructure Boom

Nuclear power, once sidelined, is resurgent thanks to government subsidies and climate goals. The shows $75 billion allocated globally in 2025, up 50% from 2020. EPC firms (engineering, procurement, and construction) like Bechtel and Fluor are key beneficiaries, building reactors and modernizing grids. These projects are government-backed, with the U.S. Infrastructure Investment and Jobs Act (IIJA) funding $65 billion for transmission upgrades alone.

2. Data Centers and Cooling Tech: The AI Powerhouse

Companies like Super Micro (SMCI) are revolutionizing energy efficiency. Its Direct Liquid-Cooling (DLC-2) systems reduce datacenter energy use by 40%, aligning with investor demand for sustainable infrastructure. The highlights how 70% of new builds are pre-leased, underscoring structural demand. Astera Labs, a semiconductor innovator, is another winner, partnering with NVIDIA to optimize AI workloads.

3. Onshoring and Talent: The Geopolitical Edge

U.S. policies like the CHIPS Act are accelerating onshoring, incentivizing domestic manufacturing of semiconductors and energy infrastructure. This trend is critical for EPC firms, which face labor shortages (382,000 monthly job openings in construction) but benefit from federal spending. Meanwhile, the shows clean energy employment up 35% since 2020—versus a stagnant retail sector—reflecting where capital is best allocated.

Why Reallocate Capital Now?

The contrast is clear: Gap's challenges are cyclical and brand-specific, while AI infrastructure's growth is structural and government-backed. The shows infrastructure funds outperforming retail ETFs by 12% annually since 2022.

Investment Thesis:
- Sell: Retail stocks like GAP, which face margin pressures, brand reinvestment needs, and declining mall traffic.
- Buy: Infrastructure equities (e.g., GII ETF) and EPC firms with nuclear/green projects. Add semiconductor enablers like SMCI and Astera (via private markets).

Risk Considerations

• Tariffs and Trade Wars: Ongoing tensions could delay supply chains for both Gap and EPC firms, but the latter's diversified government contracts offer more stability.
• Inflation: Rising rates may pressure long-duration assets, but infrastructure's fee-based revenue models (e.g., data centers) mitigate this risk.

Conclusion: The Energy Transition is the New Retail

Gap's struggles are a microcosm of the retail sector's vulnerability to macroeconomic and competitive pressures. Meanwhile, AI-driven energy infrastructure is a secular story, underpinned by policy, talent shifts, and the insatiable hunger for computational power. For investors, the choice is between betting on a fading model or owning the tools that will power the next economic era. The future is in the wires, not the racks.