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While Nvidia (NVDA) has made headlines this year — most recently when its market cap topped $3 trillion — the AI halo effect has given an unlikely industry a boost.
Utilities are typically known as one of the most boring sectors of the market. In a regulated industry whose rate structures are set by states, energy companies are not known for high growth. They are seen as defensive because electricity demand remains relatively constant across economic cycles.
Meet AI and the virtually insatiable demand for energy that data centers bring.
“With the AI rush here, energy companies are the ones contributing to this gold rush,” Sophie Karp, equity analyst at KeyBanc, told Yahoo Finance.
The S&P 500 Utility Index is up more than 10% this year, behind only communications services and information technology. Texas energy company Vistra (VST) is leading the way, more than doubling and trailing only Nvidia (NVDA) itself and Super Micro Computer (SMCI) in the S&P 500’s year-to-date rankings. Constellation Energy (CEG) comes in at number 4 with a gain of almost 70%.
Karp said that despite these gains, energy company valuations remain at historically attractive levels as profits have kept pace.
However, there is one potential circuit breaker in the story – and that is power capacity.
George Gianarikas of Canaccord Genuity raised the issue in a recent note: “What we question is how quickly the energy infrastructure to support AI can be built to support the growth ambitions of the data center companies building the infrastructure.”
If the energy companies can somehow provide the energy supply, you can expect great things. But if not, Gianarikas wrote, “expect a period of digestion for AI-related hardware. Something has to give.”
Karp, for her part, has pushed these concerns aside, saying it’s a matter of timing rather than a larger problem. In some regions, she says, there is already ample capacity. In other countries, more capital investment and more time will be required to bring more power online.
Either way, utilities could face another major catalyst: a drop in interest rates. Energy stocks tend to trade inversely to yields, so if they fall before or when the Federal Reserve (finally) starts making cuts, it could be another hair blow for the new sexy sector.
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays from 9:00 AM to 11:00 AM ET. Follow her on Twitter @juleshymanAnd read her other stories.
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