Utilities have long provided reliable power, a service we have undoubtedly come to depend on. However, growing demand puts new pressure on the electricity grid and emphasizes the need for expansion. The source of the new demand is hardly a secret: AI technology is booming and large-scale data centers are needed to support the software and applications. And those data centers are notorious power consumers.
This situation has made it profitable for utilities to expand their generation capacity and explore new energy technologies. Nuclear power, alternative energy sources, renewable energy – all are gaining attention as data center expansion continues. The result is a wave of opportunity for utility stock investors.
RBC’s Shelby Tucker, a five-star analyst who ranks in the top 2% of Street equity professionals, highlights this dynamic in a recent report: “We expect tax growth estimates to be revised upward, following trends seen in 2024 have been established. with the growth in the number of AI data centers, this, combined with the surge in manufacturing reallocation, has pushed commercial and industrial load growth to levels not seen since the early 2000s. .. Ultimately, we expect utilities whose service areas are experiencing increased interest from high-volume customers to continue updating IRPs and increasing load forecasts, leading to the potential need for more incremental resources.”
Against this backdrop, Tucker has focused on two utilities that are uniquely positioned to benefit from this trend, thanks to their strategic investments in data center infrastructure. We ran them through the TipRanks database to see what other Street experts make of his picks.
AES company(AES)
The first utility we’ll look at is AES, an energy company with an extensive portfolio of generation capacity and other assets, as well as a global footprint. From its base in Arlington, Virginia, across the Potomac from Washington, AES operates a network that spans North and South America and extends into Europe and Asia. The company’s focus is on developing and deploying technology and capacity for green power generation, carbon-free electricity and on creating smart grid technology and digital solutions that will meet the ongoing needs of the electricity sector as a business. What all this means is that AES has solid foundations, commensurate with its $9.5 billion market cap and more than $12 billion in annual revenues.
AES’s recent operating footprint includes power plants in Brazil and Argentina, power generation facilities in both the Netherlands and the United Kingdom, coal-fired power plants in India and utility-scale power generation capacity in the US. The company prides itself on its ability to tailor its facilities to local needs – and that brings us to the data center connection. In the third quarter of this year, AES added 900 megawatts of new power load to its AES Ohio operations to provide supply to meet increasing data center demand.
Data centers aren’t the only source of power demand, and AES has plenty of new programs on its plate. Along with its expanded operations in Ohio, the company also completed 2.2 gigawatts of new energy supply contracts in the third quarter, including 1.3 gigawatts of renewable energy in long-term power supply agreements. Also in the third quarter, AES reported that it had a substantial list of new projects in the pipeline that should come online before the end of this year. The company is also streamlining its operations by selling assets, with targeted proceeds of up to $3.5 billion through 2027.
All of these activities generated nearly $3.3 billion in revenue for AES in the third quarter of 24, according to the latest reported period. That revenue total fell 4% year over year and was $170 million below forecast, but the company’s profits in the quarter exceeded expectations. Non-GAAP earnings per share came in at 71 cents per share, 7 cents better than expected.
For RBC’s Tucker, the main attractive points for this stock are the company’s leading position in its niche and its solid pipeline of projects. He writes: “We view AES as a leader in sustainable IPP development, primarily from their existing pipeline and relationships with large data center customers. As one of the largest enterprise PPA developers, we expect the 66 GW pipeline and 12.7 GW backlog to largely serve data center customers building the new wave of projects. The company has also clarified that while input costs have increased in recent months, growing competition for energy procurement has resulted in PPA prices exceeding input costs, driving margin expansion.”
Tucker puts his position in quantifiable terms, rating AES Outperform (Buy), with a $17 price target, suggesting 28% one-year upside potential. (To view Tucker’s track record, click here)
The 11 recent ratings here include 9 for Buy and 1 for Hold and Sell, each for a consensus rating of Moderate Buy. AES stock is priced at $13.29 and the average price target of $20.56 implies the stock will gain 55% in the coming months. (See AES stock forecast)
Brookfield Renewable Partners(BEP)
Now we’ll turn to Brookfield Renewable Partners, the renewable energy company that operates as a public entity under the auspices of the larger Brookfield Asset Management. Brookfield Renewable Partners has a portfolio based on, as the company’s name suggests, renewable energy, with a focus on distributed and sustainable energy projects. The company’s portfolio consists of a wide range of green energy generation assets, including wind, solar and hydropower plants. These assets operate at a utility scale and are spread across North and South America, as well as Europe and Asia. Brookfield Renewable Partners boasts that its operating capacity exceeds 35,000 megawatts, with an additional 200,000 megawatts in the development pipeline.
This company is constantly proactively expanding and improving its asset portfolio. A quick look at the highlights from the recent Q3 24 report will confirm this. During the third quarter of this year, BEP commissioned approximately 1,200 megawatts of new renewable energy capacity, and the company expects to reach a record level of 7,000 megawatts of new energy capacity for the full year. The company continued its commercial initiatives, securing contracts to supply “an additional 6,100 gigawatt hours per generation year.” To support this activity, the company had $4.6 billion in liquidity at the end of the third quarter. The company owes its success to rapidly growing demand, especially from the technology sector – and within that to the rapid expansion of data centers and AI development.
Looking at the financial results, BEP posted revenues of $1.47 billion in the third quarter, a total that was almost 25% higher than the year before and came in $40 million better than forecast. However, the company missed the bottom line estimates; quarterly funds from operations (FFO) of 42 cents per share were a cent less than expected.
This miss did not bother RBC, and Shelby Tucker notes both BEP’s scale and expansion: “Over the past five years, BEP has more than doubled its clean energy contracts to business customers to more than 20 TWh/year (which equates to approximately ~30% of total contracted volume), and management expects this to double to 44 TWh/year by 2028. Big tech represents a minority of what is currently contracted, but management expects big tech most of the volume growth in the future will go to business customers. Last year, the company signed a contract to supply 35 TWh (delivered over a number of years) to large technology companies, representing approximately 78% of contracts to business customers and 70% of new contracts to all customers.”
These comments support an Outperform (Buy) rating on BEP, while the $31 price target suggests a one-year upside of 26% for the stock.
These stocks have earned a Strong Buy consensus rating, based on 9 reviews, including 7 Buys and 2 Holds. The stock is currently trading at $24.54, and its average price of $31.11 closely matches RBC’s outlook. (To see BEP stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.
