Big tech energy demand is insatiable in the age of artificial intelligence. This sent Constellation Energy stock (CEG) booming.
Shares of Constellation, the largest operator of nuclear power plants in the United States, are up more than 85% year to date, fresh off an all-time high in May. Shares of the Baltimore-based company outperformed all other holdings in the S&P 500 Utilities Select Sector ETF (XLU).
Much of the excitement lies in Wall Street’s expectation that Constellation will inevitably enter into a “co-location” deal with one or more big tech players, allowing those companies to build data centers needed to using AI right next to Constellation’s nuclear power plants to access carbon-free energy. power.
Constellation CEO Joe Dominguez said during a recent media roundtable that the company was “in quite discussions with a number of companies that are interested in doing this.”
Amazon (AMZN), the alphabet (GOOGLE), Microsoft (MSFT), and meta (META) should spending a total of $200 billion this year on investments in cloud and AI, including the construction and maintenance of data centers.
Meanwhile, electricity demand from data centers in the United States expected to more than double by 2030 thanks to the use of AI, according to a study by the consulting firm McKinsey & Co.
Other independent power providers stand to benefit from growing demand for data center power, including Vistra Corp (VST) and NRG Energy (GRN), up about 120% and 55% respectively since the start of the year.
But Wall Street analysts say Constellation stands out from the rest because it has the largest fleet of nuclear power plants in the United States, with 21 reactors across the country used to generate electricity. This could better serve Big Tech players looking to meet their carbon emissions targets.
The stock has nine analyst ratings of Buy, five of Hold, and zero of Sell.
“Nuclear plant operators are the only ones who actually have the capacity to service a data center that will operate 24 hours a day, seven days a week, 365 days a year, with carbon-free generation,” James Thalacker, utilities, analyst of energy and renewables at BMO, told Yahoo Finance.
In a sign of that demand, Amazon earlier this year purchased a $650 million data center campus in Berwick, Pennsylvania, adjacent to a nuclear power plant owned and operated by Talen Energy. This deal was the first of its kind for Amazon. The 1,200-acre data center will be powered by the nearby nuclear facility.
Analysts say Constellation factories in Illinois and Pennsylvania could be ideal locations for big tech.
The company also has other advantages, analysts say. Unlike traditional utility companies, Constellation is unregulated, meaning the energy rates it sets do not 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 to some extent on market power prices.”
The company is also benefiting from the Biden administration’s Inflation Reduction Act, aimed at encouraging the green energy transition. Kalton points out that Constellation produces electricity at about $25 per megawatt hour, while the IRA allows a floor sales price of about $45 per megawatt hour, with no limit on the amount.
“There is a lot of interest in data center developers entering into long-term contracts at higher prices,” the analyst said. “There is conceptually no limit to the profits they can make. »
If electricity prices get too high too quickly, Constellation and others in the industry could face increased scrutiny from Washington.
“Ideally, a slow and steady increase in electricity prices (with some volatility around this vector) is the best outcome for customers, producers and shareholders. On the other hand, a rapid or abrupt change is likely to attract unwanted political attention.” » wrote BMO’s Thalacker in a recent note.
Constellation has been operating as a standalone energy provider since 2022 after splitting from utility giant Exelon (EXC). The company, which also focuses on renewable energy and hydroelectric power, has been buying back shares and recently increased its dividend.
In 2023, Constellation signed an agreement with Microsoft to reduce emissions at one of the software giant’s data centers through carbon-free energy, a process that 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 of its solar project in Texas.
In Constellation’s most recent quarterly earnings conference call, the company forecast annual earnings per share growth of 10% for the remainder of this decade.
If electricity prices were to rise, or if the Big Tech deals Wall Street is hoping for come to fruition, “that 10% could get a lot higher,” Kalton said.
Ines Ferre is a senior economics reporter for Yahoo Finance. Follow her on @ines_ferre.
