Electric utilities may not always seem like the most exciting way to invest, but investors may have to rethink that opinion, as they are performing very well. S&P 500 This year’s index stocks are retail electricity and power generation utilities Vista (NYSE: VST)up 210% this year. That beat Nvidia‘s (NASDAQ: NVDA) 155% increase. The two events are unrelated. Here’s why and how Vistra stock has done so well this year.
Data centers, electricity demand, and clean energy
It’s no secret that the growing demand for artificial intelligence (AI) applications is the reason for the step change in expectations for data center demand. This is what increases the demand for graphics processing units (GPUs) and high-performance computing chips. That’s good news for tech companies like Nvidia and Taiwan Semiconductor Manufacturing.
While the latter is the beneficiary, there are also data center equipment companies like Vertiv Holdings. If you are looking for a value play in the theme, then the heating, ventilation, air conditioning and refrigeration sectors, in particular Johnson Controls, worth a look.
But, I digress. The focus point of this article is the need to power data centers and increasing electricity needs. In particular, it is in an environment where policy makers remain committed to a clean energy transition. That’s where companies and utilities like Vistra and Constellation Energy (NASDAQ: CEG) come into play.
Vista
Vistra is a retail electricity and power generation company. By the end of 2023, there will be 4 million retail customers, and the Energy Harbor acquisition in March adds another 1 million. The Harbor Energy deal also adds 4,000 megawatts (MW) of nuclear power generation to the 36,702 MW that Vistra will complete by 2023, with 2,400 MW from nuclear.
As such, the deal makes Vistra “the largest competitive power generator in the country” and makes it the second largest competitive nuclear generator in the US. . This is particularly important as coal power plants are being shut down in line with the clean energy transition.
Clean energy transition
While no one doubts that the transition will happen, it is also undeniable that sentiments about the pace of the transition have also changed. The long-term policy outlook remains favorable to renewable energy; Natural gas will likely be an important part of energy generation for decades.
That’s also good news for Vistra, as about 24,000 MW of its current 41,000 MW capacity comes from natural gas. Thus, the increase in share prices this year also reflects the improved outlook for natural gas and confidence in Vistra’s 6,400 MW nuclear capability.
Enter Amazon and Microsoft
The three largest cloud service providers are Amazon Web Services, Microsoft‘s Azure, and Alphabet‘s Google Cloud, and must ensure long-term power to support the data center. As such, Microsoft and Amazon concluded a long-term power purchase agreement (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 purchased power for its data center, and Constellation will restart the Three Mile Island nuclear plant to support the agreement. It is positive for the market, and also the price that Microsoft is willing to pay for power.
According to Reuters, Microsoft paid up to $115 per megawatt-hour (MWh) in the agreement. This compares to Vistra’s 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 is significant upside potential for future market prices for nuclear-powered energy, thanks to the Microsoft/Constellation deal and the ever-growing demand stimulated by AI. Vistra’s acquisition of Energy Harbor strengthens the case. In addition, Vistra recently announced that it is buying the remaining 15% of its subsidiary Vistra Vision (which has zero-carbon nuclear, energy storage, and solar generation businesses) for $3.085 billion.
Vistra’s natural gas, nuclear, and renewables capabilities are positive assets for the clean energy transition. Considering these factors, it is no surprise that the sector is hot. Adding in falling interest rates (utilities often seem interest rate sensitive due to their debt burdens) is a recipe for sharp price appreciation.
Should you invest $1,000 in Vistra right now?
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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. Motley Fool positions 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.
Here Are the Best S&P 500 Stocks in 2024 (Hint: It’s Not Nvidia) was originally published by The Motley Fool
