Utility companies have been facing challenges due to high inflation in recent years, as customers push back against rising prices and interest rates drive up credit costs, adding to the providers’ debt burden. However, there is good news for utility investors, as long-term trends are bullish for utility stocks. The demand for electricity is on the rise, fueled by the AI boom and the increasing use of power-hungry data centers, as well as the growing popularity of electric vehicles.
According to analyst Julien Dumoulin-Smith from Jefferies, utility stocks are a solid choice for investors. He emphasizes the transformation happening with the proliferation of data centers, noting that unregulated merchants can capture outsized profits and cash flows. The demand for electricity is projected to grow by 2-4% annually through 2030, driven primarily by data centers. Data center demand is expected to represent 6-8% of total US demand, up from 2-3% currently.
Dumoulin-Smith has made two specific recommendations on utility stocks based on the rising demand for data centers. Both of his picks have Strong Buy consensus ratings from the Street. Let’s take a closer look at these recommendations.
Talen Energy (TLN)
Talen Energy is an independent power and infrastructure company, one of the largest in North America. The company focuses on delivering safe and reliable power generation, with a diverse portfolio including nuclear, natural gas, oil, and coal assets. Talen’s Susquehanna nuclear power plant is a key asset, providing clean and reliable power 24/7. The company operates in five states and produces up to 10.7 gigawatts of power.
Talen has positioned itself as a leader in providing energy for data centers, which are known for their high power consumption. The company has a track record of delivering clean power on demand and expanding its generating capabilities to meet the needs of data centers and AI applications. In the last reported quarter, Talen posted a revenue of $489 million, up 62.5% year-over-year, with an EPS of $7.60. The stock has gained 160% year-to-date.
Dumoulin-Smith sees significant growth potential for Talen, driven by the increase in electricity demand from data centers. He has given the stock a Buy rating with a price target of $232, implying a 38.5% upside in the next 12 months. The Street consensus is also bullish, with a Strong Buy rating and an average target price of $195.8, pointing to a 17% upside potential.
Vistra Energy (VST)
Vistra Energy is a Texas-based power company that generates electricity at utility scales, producing enough power to supply 20 million homes. The company operates in all major competitive wholesale markets in the US, focusing on reliability, affordability, and sustainability. Vistra’s power generation portfolio includes natural gas, coal, nuclear, and solar facilities, as well as battery facilities for energy storage. The company is expanding its zero-carbon generation footprint and provides energy to over 5 million customers.
Vistra’s core business brought in $3.85 billion in revenues in the last reported quarter, with a net income of $467 million. The company is focusing on data center-related growth, with a large fleet of CCGTs and nuclear plants catering to specific customer needs. Dumoulin-Smith believes that Vistra is well-positioned to benefit from the increase in power and capacity prices, higher plant utilization, and potential contracts with data centers. He has a Buy rating on the stock with a $99 price target, suggesting an 11% upside in the next year.
The Street consensus is also Strong Buy, with an average target price of $108.17, indicating a 21% upside potential from the current trading price of $89.4. Overall, utility stocks like Talen Energy and Vistra Energy present attractive opportunities for investors looking to capitalize on the growing demand for electricity from data centers and other sources.
