This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Power utilities aren't always seen as the most exciting way to invest, but investors might need to rethink that opinion, because the top-performing S&P 500 index stock of the year is retail electricity and power generation utility Vistra (NYSE: VST), up a whopping 210% this year. That beats Nvidia's (NASDAQ: NVDA) 155% increase. The two events are not unconnected. Here's why and how Vistra stock has performed so well this year.
Data centers, electricity demand, and clean energy
It's no secret that the burgeoning demand for artificial intelligence (AI) applications is the reason for the step change in expectations for data center demand. That's what's fueling increased demand for graphics processing units (GPUs) and high-performance computing chips. That's great news for technology companies like Nvidia and Taiwan Semiconductor Manufacturing.
While the latter are apparent beneficiaries, there are also data center equipment companies like Vertiv Holdings. If you are looking for a value play on the theme, then the heating, ventilation, air conditioning, and refrigeration sector, particularly Johnson Controls, is worth looking at.
However, I digress. This article's focal point is the need to power data centers and increased electricity demand. In particular, it is in an environment where policymakers remain committed to the clean energy transition. That's where companies and utilities like Vistra and Constellation Energy (NASDAQ: CEG) come into play.
Vistra
Vistra is a retail electricity and power generation company. At the end of 2023, it counted 4 million retail customers, and the acquisition of Energy Harbor in March added another 1 million. The Harbor Energy deal also added 4,000 megawatts (MW) of nuclear generation to go along with the 36,702 MW with which Vistra ended 2023, with 2,400 MW from nuclear.
As such, the deal made Vistra "the largest competitive power generator in the country" and made it the second-largest competitive nuclear generator in the U.S. Investors are falling in love with nuclear energy as a clean, sustainable, and zero-carbon baseload option. That's particularly relevant as coal-powered plants are being closed down in accordance with the clean energy transition.
The clean energy transition
While nobody doubts that the transition will take place, it's also indisputable that sentiment over the pace of the transition has changed, too. The long-term policy outlook remains favorable to renewable energy; natural gas will likely be a significant part of energy generation for decades.
That's also good news for Vistra, because about 24,000 MW of its current 41,000 MW capacity comes from natural gas. As such, the rise in the stock price this year also reflects a more favorable view of natural gas and a vote of confidence in Vistra's 6,400 MW nuclear capability.
Enter Amazon and Microsoft
The three biggest cloud service providers are Amazon Web Services, Microsoft's Azure, and Alphabet's Google Cloud, and they need to ensure long-term power to support their data centers. As such, Microsoft and Amazon completed long-term power purchase agreements (PPA) with Vistra this year.
Still, it's the 20-year PPA that Microsoft recently signed with Constellation Energy that has excited the market. Microsoft is purchasing power for its data centers, and Constellation will restart the Three Mile Island nuclear plant to deliver on the agreement. That's a positive for the market, and so is the price that Microsoft is willing to pay for the power.
According to Reuters, Microsoft is paying up to $115 per megawatt-hour (MWh) in the agreement. That compares favorably with Vistra's total realized price of $51.20 MWh in the second quarter of 2024.
A stock to buy
The bull case for Vistra rests on the idea that there's significant upside potential for future market pricing for nuclear-powered energy, given the Microsoft/Constellation deal and burgeoning demand stimulated by AI. Vistra's acquisition of Energy Harbor strengthened that case. In addition, Vistra recently announced it was buying the remaining 15% of its Vistra Vision subsidiary (which houses its zero-carbon nuclear, energy storage, and solar generation businesses) for $3.085 billion.
Vistra's natural gas, nuclear, and renewable capabilities are positive assets for the clean energy transition. Considering these factors, it's no surprise that the sector is hot. Adding falling interest rates (utilities are often seen as interest rate sensitive due to their debt loads) is a recipe for sharp price appreciation.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Lee Samaha has no position in any of the 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: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
