Retail electric utilities and power producers have outperformed attractive technology stocks this year.
Power utilities aren’t always considered the most exciting investment, but the S&P 500’s best-performing stock this year has been retail power and generation company Vistra (VST 3.12%), so investors can You may need to reconsider your opinion. This year, it increased by a whopping 210%. This outpaces Nvidia (NASDAQ:NVDA)’s 155% increase. The two events are not unrelated. Here’s why Vistra stock has performed so well this year and how it works.
Data centers, power demand, clean energy
It’s no secret that the surge in demand for artificial intelligence (AI) applications is the reason for the gradual shift in data center demand expectations. This is what is driving the increased demand for graphics processing units (GPUs) and high-performance computing chips. This is good news for technology companies like Nvidia and Taiwan Semiconductor Manufacturing Co.
While the latter is clearly a beneficiary, there are also data center equipment companies like Vertiv Holdings. If you’re looking for value plays in this theme, it’s worth looking at the Heating, Ventilation, Air Conditioning, and Refrigeration sector, and Johnson Controls in particular.
But that’s another story. The focus of this article is the need to power data centers and the increasing power demand. Especially in an environment where policymakers continue to grapple with the transition to clean energy. That’s where companies and utilities like Vistra and Constellation Energy (CEG 0.09%) come in.
Vistra
Vistra is a retail electricity and generation company. By the end of 2023, the company will have 4 million retail customers, adding another 1 million with its acquisition of Energy Harbor in March. The deal with Harbor Energy provides Vistra with 36,702 megawatts (MW) of nuclear power by the end of 2023, plus an additional 4,000 megawatts (MW) of nuclear power.
Image source: Getty Images.
As such, the deal made Vistra “the nation’s largest competitive power generation company” and the second most competitive nuclear power plant in the United States. Investors are hooked on nuclear power as a clean, sustainable, zero-carbon baseload option. . This is especially important as coal-fired power plants are being shut down due to the transition to clean energy.
Transition to clean energy
While no one doubts that the transition will take place, there is no doubt that sentiment about the pace of transition is also changing. The long-term policy outlook remains favorable for renewable energy. Natural gas will be an important part of energy generation for decades to come.
This is also good news for Vistra, as about 24,000 MW of its current 41,000 MW of power generation capacity comes from natural gas. As such, the stock’s rise this year also reflects a more favorable view of natural gas and a vote of confidence in Vistra’s 6,400 megawatts of nuclear capacity.
Enter Amazon and Microsoft
The three largest cloud service providers – Amazon Web Services, Microsoft’s Azure, and Alphabet’s Google Cloud – need to ensure long-term power to support their data centers. To that end, Microsoft and Amazon completed a long-term power purchase agreement (PPA) with Vistra this year.
Image source: Getty Images.
Still, what got the market excited was Microsoft’s recent 20-year PPA with Constellation Energy. Microsoft is purchasing power for its data centers, and Constellation plans to restart the Three Mile Island nuclear power plant to fulfill the agreement. This is a positive for the market, as is the price Microsoft is willing to pay for that ability.
According to Reuters, Microsoft will pay up to $115 per megawatt hour (MWh) in the deal. This compares favorably with Vistra’s total realized price of 51.20 MWh in Q2 2024.
stocks to buy
Vistra’s bullish argument is based on the idea that there is significant upside potential for future market prices for nuclear energy, given the Microsoft-Constellation deal and the surge in demand spurred by AI. Vistra’s acquisition of Energy Harbor strengthened that argument. Additionally, Vistra recently announced that it will acquire the remaining 15% of the Vistra Vision subsidiary (based on zero-carbon nuclear, energy storage, and solar power businesses) for $3.085 billion.
Image source: Getty Images.
Vistra’s natural gas, nuclear and renewable energy capabilities are positive assets for the transition to clean energy. Considering these factors, it’s no wonder this field is gaining attention. Add in falling interest rates (utilities are often sensitive to interest rates because they are in debt) and you end up with steep price increases.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Constellation Energy, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Johnson Controls International and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
