Why Do the Picks and Shovels of a Theme Matter?

By Adam Patti, Chief Executive Officer, VistaShares | Published November 13, 2026

Picks and shovels investing focuses on the suppliers a theme cannot be built without, rather than on the companies competing to win the end market. The idea comes from the gold rushes, when merchants selling tools could earn steady revenue whether or not any one prospector struck gold. In today’s buildouts, the picks and shovels are chips, power equipment, cooling, optics, materials and components that every competitor needs to buy.

Where does the phrase come from?

During the California gold rush of the mid-1800s, many prospectors spent heavily and found little. Merchants who sold them picks, shovels, pans, clothing and supplies earned revenue from every prospector, successful or not. The lesson investors drew is that in a rush to build something new, the suppliers of essential inputs can benefit from the overall level of activity without needing to pick the winner.

What does picks and shovels mean in modern themes?

In any large buildout, a set of suppliers sells to all of the competitors. Some examples:

AI: many companies are racing to build and sell AI models and services. All of them need chips, memory, servers, networking, power and cooling. The suppliers of those inputs earn revenue regardless of which model wins.

Power and electrification: utilities and developers compete to build generation, but all of them need transformers, switchgear, cables, turbines and grid connection equipment.

Space: satellite operators compete for customers, but they share demand for launch services, components, ground stations and specialized materials.

Robotics: humanoid and industrial robot makers compete on design and software, but they all need actuators, motors, gears, sensors and batteries.

Defense: prime contractors assemble systems, while thousands of suppliers provide propellants, electronics, castings and other components.

Why can suppliers be attractive?

Exposure to the whole buildout: a supplier that sells to every competitor benefits from total spending, not from one competitor’s market share.

Less winner risk: picking which end-market company dominates is hard. Suppliers can sidestep that question.

Bottleneck pricing: when a component is scarce, such as large power transformers or advanced memory, its suppliers can have pricing power. Our article on grid transformers as an AI bottleneck describes one such constraint.

Visible demand: suppliers often work from multi-year order backlogs tied to capital spending plans, which gives some visibility into future revenue.

How big is the supplier opportunity?

Cost breakdowns show how much of a buildout’s spending goes to supplier groups. Epoch AI estimated in May 2026 that a one-gigawatt AI data center costs about $37.9 billion up front, with about $21.2 billion going to servers, about $11.4 billion to the facility and about $4.9 billion to networking.¹ Every dollar in those lines is revenue for someone in the supply chain.

In power, the International Energy Agency estimated global grid investment at about $541 billion in 2026, up from about $322 billion in 2016, in 2025 dollars.² That spending flows to manufacturers of transmission and distribution equipment, cables and grid technology.

In space, the Space Foundation estimated that commercial infrastructure and support industries accounted for about $158.3 billion of a $686 billion global space economy in 2025.³

Our article on the AI data center bill of materials breaks the data center costs down further.

What are the risks?

Cyclicality: suppliers ride the capital spending cycle. When buyers pause, orders can drop sharply, and supplier revenue often falls faster than the end market. The old saying cuts both ways: merchants did well during the rush and less well after it ended.

Competition and commoditization: not every pick is scarce. Components that many suppliers can make tend to see prices fall as capacity expands, which squeezes margins.

Customer concentration: some suppliers depend on a handful of very large buyers. Losing or renegotiating with one can have a large effect.

Technology shifts: a new design can reduce or eliminate demand for a component. A shift in cooling methods, chip packaging or actuator design can move spending from one supplier group to another.

Valuation: when the market recognizes a supplier as a key enabler, its share price can rise ahead of the spending, leaving less room for further gains and more room for disappointment.

How do picks and shovels fit into thematic portfolios?

Supplier-focused approaches typically map a buildout into its components and select companies that supply each one. This differs from approaches that hold the most widely known companies associated with a theme, which are often end-market players or platform companies. A bill of materials approach, which weights exposure by where the spending goes, is one systematic way to build a picks and shovels portfolio. Our article on bill of materials investing explains it.

Investors often combine both views: some exposure to end-market leaders, some to the suppliers. The balance depends on whether the investor wants to bet on who wins or on the overall level of building.

Do picks and shovels change over time?

Yes. The essential inputs of a buildout shift as it matures. Early in a cycle, scarce components such as advanced chips or specialized equipment often capture the most attention and pricing power. As capacity expands, those inputs can become more widely available, and the constraint moves elsewhere, for example to power supply, grid connections or skilled construction labor. A picks and shovels view therefore needs regular review, following the bottleneck rather than assuming that today’s key supplier keeps that role for the life of the theme.

How can investors identify the picks and shovels in a theme?

Follow the cost breakdown: which components absorb the most spending?

Look for bottlenecks: where are lead times longest, capacity tightest or suppliers fewest?

Read buyer filings: large buyers sometimes discuss supply constraints and key vendors in annual reports and earnings calls.

Check supplier backlogs: order backlogs and book-to-bill ratios reported by suppliers show how demand is tracking.

The Thematic ETF Guide collects articles on the supply chains behind several buildouts.

Frequently asked questions

What does picks and shovels mean in investing?

It means investing in the suppliers of essential inputs to a booming industry rather than in the companies competing in the end market. The phrase comes from the gold rushes, when merchants selling tools to prospectors could do well regardless of which prospectors found gold.

Are picks and shovels stocks less risky?

They avoid some risks, such as picking the winning end-market company, but carry others. Suppliers are often more cyclical than their customers, can face commoditization and may depend on a few large buyers. Their share prices can fall sharply when capital spending slows.

What are examples of picks and shovels in AI?

Categories include chips and memory, servers, networking and optics, power equipment such as transformers and switchgear, cooling systems, and data center construction. Each sells to many companies building AI capacity, so their revenue depends on total spending rather than on which AI service succeeds.

How is picks and shovels different from bill of materials investing?

Picks and shovels is the general idea of investing in suppliers. Bill of materials investing is a systematic way to do it: estimate how a buildout’s spending divides across components and weight supplier exposure in proportion to those shares.

Do suppliers benefit if the theme disappoints?

Only while spending continues. Suppliers earn revenue from the buildout itself. If buyers conclude that they have built too much, orders can fall quickly, and suppliers often see revenue decline faster than the end market.

How do investors spot a bottleneck supplier?

Signs include long lead times, rising order backlogs, price increases that stick, few qualified competitors and buyers discussing supply constraints in their filings. Bottlenecks can ease as new capacity comes online, so they are often temporary.

Cite this page: Adam Patti, "Why Do the Picks and Shovels of a Theme Matter?," VistaShares, updated November 13, 2026, https://www.vistashares.com/picks-and-shovels-investing/. Plain-text version.

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