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Category: Power and Utilities

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AI Alternative Energy Cloud Service Providers Industry Power and Utilities Stocks

NextEra: The Green Energy Leader Can Benefit From Data Center

NextEra Energy

NextEra Energy (NEE) $84 has a huge scale of operations. It is the largest green energy producer in the world and the largest player in the U.S. market with more than 20% market share. Long-term revenue of at least 10% a year and dividend growth seem assured, but I would wait for a better entry price.

The U.S. is forecast to experience a significant growth in electricity demand in the coming years, fuelled by the growth in data centers and AI, the proliferation of electric vehicles, the increased use of energy in the home, and the increasing number of extreme weather events, especially prolonged heat spells.

Estimates vary, but NEE is expecting a 38% growth in power demand over the next 20 years (Statistica says 27%); that growth is 4 times higher than the growth seen in the previous 20 years. Clearly, data center demand will outstrip decades of growth, given the hyper scaler Capex.

NEE has a solid balance sheet with an A- credit rating and its unprecedented scale allows it to access huge amounts of capital. Its operating margins are more than 30% – This is a huge competitive advantage especially if data center power generation pans out. The long-term nature of their business and proven ability to generate cash over a long period de-risks the high level of debt.

The stock is up 55% in the past year but is definitely interesting to buy on a pullback.

Categories
AI Alternative Energy Cloud Service Providers Power and Utilities Stocks

Constellation Energy Could Be Interesting To Buy On A Dip

Constellation Energy (CEG) has surged over 130% in the past year to $280 – I would wait for a pullback. 

Constellation Energy (CEG) and NextEra Energy (EEE) are the largest carbon-free / nuclear energy companies in the US today. It’s important to note here that a nuclear power generator can operate cheaper than other energy sources but only if it’s already in commission.

New nuclear plants will take a huge amount of government help, subsidies, permissions, and cost overruns. Future profitability and cash generation will take a long time, so existing players like Constellation and Next Era who have a large nuclear/carbon-free energy share of total power generation have definite competitive advantages.

Microsoft’s deal with Constellation should be accretive to earnings from 2028. (Assuming that the govt okays the deal and it gets on track).

However, analyst haven’t added this to their forecasts, so there is a great deal of skepticism there. Constellation, by itself, is not a very efficient company, with operating margins at 8-12%, much lower than Next Era’s. 

AI needs power: With the renewed focus on nuclear energy power generation, investors likely expect the AI-driven surge to carry on as AI infrastructure investments enter the next scaling stage. OpenAI’s ability to raise more funds at a much higher valuation than the previous year has strengthened the AI growth thesis. Nvidia’s (NVDA) commentary suggests its new Blackwell chips are already sold out over the next twelve months has renewed the market’s interest in the AI theme, potentially benefiting nuclear power generators like CEG.

Money talks: Huge data center operators and hyperscalers have demonstrated their willingness to pay a substantial premium to secure their power requirements. Unless the AI monetization opportunities fail to pan out convincingly over the next few years, it seems reasonable to expect CEG’s much more robust profitability outlook to play out in the medium term.

Regulations remain tight: Possible market structure changes and regulatory hurdles could affect a more robust outlook moving ahead. Despite that, the government seems keen to restart nuclear plants, corroborating the fervor in CEG and its leading nuclear peers.

In addition, Constellation’s ability to obtain a federal loan guarantee (cleared initial review stage) to help finance the restart of the Three Mile Island nuclear plant is expected to provide more confidence to investors. However, investors could consider buying CEG at a dip, and not chase the stock, with so many uncertainties.

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Power and Utilities Stocks

AES Corp Is A Decent Utility  

AES Corp (AES) $16.85 (Utility, decent dividend yield) Can buy on declines or accumulate don’t expect more than 7%-8% per year, though datacenter operations could be a nice surprise. 

Flat for a long time – 10 years the stock returned just 12%, it is down 12% in the past year. Revenues and operating earnings also went nowhere during the same time, selling some legacy coal, and switching to renewable energy, 

Earnings growth for the next three years is estimated at 8%, revenue at 4%. 

The 4% dividend yield is interesting 

​​BBB debt rated – middle of the pack, most utility dividend investors would prefer at least BBB+. 

Core player in the renewable sector, with a growing 25-30 GW portfolio of solar power until 2027 – The trend towards renewable energy helps them. 

Expected demand from Datacenters- Some of the company’s major customers include Amazon, Microsoft and Google, major IT businesses, all of whom have Co2-neutral commitments to their operations by 2030 or earlier – and the company’s backlog is over 40% with customers that are large tech companies. 

  • Transitioning from coal and gas-fired power plants to renewables and storage and still has impairment losses due to the coal exit.  
  • Low margins – not efficient, compared to its competitor Brookfield Renewables, AES has a lower dividend yield and a lower EBITDA margin.  
  • These are still high debt levels. $26.5B net debt equals more than two times the current market cap, about eight times the adjusted 2023 EBITDA, and about 26 times the 2023 free cash flow. Three peers BEP, AY and TEC have lower debt ration – some at slightly higher rates but this will improve once rates go down.