Big Tech’s energy demand is insatiable in the artificial intelligence era. That’s sent Constellation Energy stock (CEG) soaring.
Shares of Constellation, the largest nuclear plant operator in the US, are up more than 85% year to date, after touching an all-time high in May. The Baltimore-based company’s stock has been a top performer within the S&P 500 Utilities Select Sector ETF (XLU).
Much of the excitement lies in Wall Street’s expectation that Constellation will inevitably craft a “collocation” deal with one or more Big Tech players, enabling those companies to build data centers needed for AI use right next to Constellation’s nuclear plants for access to carbon-free power.
Constellation CEO Joe Dominguez said at a recent media roundtable that the company is “fairly deep in discussions with a number of companies that are interested in doing that.”
Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and Meta (META) are expected to spend a combined $200 billion this year on cloud and AI investments, including building and maintaining data centers.
Meanwhile, power demand from data centers in the US is expected to more than double by 2030 thanks to use of AI, according to research from consulting firm McKinsey & Co.
Independent power providers expected to benefit from growing energy demand in the US include Vistra Corp (VST) and NRG Energy (NRG), up about 130% and 55% year to date, respectively.
But Wall Street analysts say Constellation stands out among other utility names as it has the largest nuclear plant fleet in the US — with 21 reactors across the country used to generate electricity. This could better serve Big Tech players who are looking to reach their carbon emissions goals.
The stock has nine Buy, five Hold, and zero Sell analyst ratings.
“Nuclear plant operators are the only ones that really have the ability to serve a data center that is going to run 24 hours a day, seven days a week, 365 days a year, with carbon-free generation,” James Thalacker, utilities, power, and renewables analyst at BMO, told Yahoo Finance.
In one sign of the demand, earlier this year Amazon bought a $650 million data center campus in Berwick, Pa., adjacent to a nuclear power plant owned and operated by Talen Energy. The agreement was the first of its kind for Amazon. The 1,200-acre data center will be powered by the nuclear facility next door to it.
Analysts say Constellation’s Illinois and Pennsylvania plants could be ideal locations for Big Tech.
The company has other advantages as well, analysts said. Unlike regular utility companies, Constellation is not regulated, meaning the energy rates it sets don’t need to be approved by regulators.
“Constellation is really more of an energy play,” Neil Kalton, senior equity analyst at Wells Fargo, told Yahoo Finance in a recent interview.
“The revenues they get are based on market power prices to a degree.”
The company also benefits from the Biden Administration’s Inflation Reduction Act, aimed at incentivizing the green energy transition. Kalton highlights that Constellation produces power at roughly $25 per megawatt hour, while the IRA allows a selling floor price of roughly $45 per megawatt hour with no limit to how high it can go.
“There’s a lot of interest in data center developers entering into long-term contracts at premium prices,” said the analyst. “There is conceptually no limit on the profits they can make.”
If power prices get too high too quickly, though, Constellation and others in the industry could face scrutiny from Washington, say analysts.
“Ideally, a slow and steady rise in power prices (with some volatility around that vector) is the best outcome for customers, generators, and shareholders. On the other hand, a rapid or abrupt move is likely to garner unwanted political attention,” wrote Thalacker of BMO in a recent note.
Constellation has been operating as a standalone energy provider since 2022 after spinning off from utility giant Exelon (EXC). The company, which is also focused on renewables and hydroelectric energy, has been buying back shares and recently upped its dividend.
In 2023, Constellation inked a deal with Microsoft to reduce emissions at one of the software giant’s data centers through carbon-free energy matching, a process which involves identifying clean energy regionally and accounting for it every hour of every day.
In recent years it has signed agreements with PepsiCo, McCormick, and Best Buy to power their operations with renewable energy from its solar project in Texas.
During Constellation’s latest quarterly results call, the company forecast annual earnings per share growth of 10% through the rest of this decade.
If power prices were to move higher, or the Big Tech deals that Wall Street is hoping for materialize, “that 10% could turn into far higher,” Kalton said.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.
Source Agencies
