Demand to power artificial intelligence engines has helped lift shares of one of the largest U.S. power producers, Vistra Corp., even higher than Wall Street darling Nvidia Corp.
Investors, including Daniel Loeb, the billionaire founder of Third Point LLC, has been snapping up shares of Vistra, betting that a huge boom in demand, fueled in part by power-hungry, artificial intelligence-powered data centers, will only grow. That has sent the stock up more than 300% over the past 12 months, making the Texas firm the best performer in the S&P 500 index, a benchmark it joined less than a month ago. Utility stocks included in the index are up about 10% over the same period.
“Electricity demand is extremely strong and it’s driven by the data center trade,” but Vistra’s combination of gas and nuclear power plants makes it a “unicorn,” according to Guggenheim’s Shahriar Pourrez, who has set the highest price target for the stock on Wall Street. priced at $133.
After hitting a record high earlier in the week, shares sold off Friday as Vistra detailed plans to increase natural gas production capacity in Texas. Investors are concerned that this could be “the tip of the oversupply iceberg,” Purreza wrote in a note to clients, but he views the changes as “somewhat modest.”
Array Goldman Sachs estimates data center power demand will more than double by 2030, with many utilities expected to benefit. But Vistra’s position as one of the state’s few independent power producers (a status that means it sells power at market prices, unlike regulated utilities) has left it in a league of its own and buoyed the stock.
Since Vistra is a direct participant in the market, “the most obvious investment thesis is that wholesale electricity prices will rise,” Thomas Merick, an analyst at Janney Montgomery Scott, said in an interview.
Vistra’s role as a major player in the growing Texas energy market and, following its acquisition of Energy Harbor Corp. for more than $6 billion – as a major owner of nuclear generating capacity helps attract investors. Since the company’s nuclear fleet is eligible for tax credits for electricity generation under the Inflation Relief Act, it could also attract major players in the AI field.
Data centers need clean energy around the clock, and “nuclear power plants are a very good way to do that,” Guggenheim’s Purreza said. Investors expect the company to be able to contract its factories directly with data centers, similarly energy consumption agreement between Constellation Energy Corp. and Microsoft Corp., he added.
Other key future catalysts will include the company’s early earnings per share guidance and the company’s long-term outlook, Purreza said.
Even after launch, Vista’s standard screens are relatively inexpensive compared to other ways to play the AI game and the data center boom, according to Janney’s Meric. The company’s shares trade at about 17 times next year’s earnings, compared with Nvidia’s multiple of 37. Wall Street analysts are overwhelmingly positive, with 10 of 11 Bloomberg surveyed giving the stock a buy rating.
Morningstar analyst Travis Miller, who has a sole sell rating on the stock, said the trends driving the rally could falter. First, growing renewable electricity generation could displace legacy power generators in Texas.
“The market has become overexcited,” Miller said. Current analyst price targets suggest there could be a cooling ahead, with the $108 average suggesting 12% growth over the next 12 months, and even Purreza’s $133 Street high suggesting a slower pace of growth.
But for devotees, including activist investor Loeb, the expansion of renewable energy is another reason to buy. The intermittent nature of wind and solar power supports the case for legislation favoring natural gas installations such as Vistra’s plants, which are available in a pinch, it wrote in the April letter.
Vistra was one of its hedge fund’s top five winners in the first quarter, and Loeb cited power demand from data centers and electric vehicles as another reason for long-term confidence.
“Vistra is in a better position to benefit from these trends,” he wrote. “We expect the discount applied to their assets to continue to narrow as their businesses become increasingly important to meeting domestic electricity demand.”