Texas Utility Stock Powers Past Nvidia in 300% AI-Fueled Rally

(Bloomberg) — The demand to feed the engines of artificial intelligence has helped vault shares of one of the largest US power producers, Vistra Corp., higher even than Wall Street darling Nvidia Corp.

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Investors, including Daniel Loeb, the billionaire founder of Third Point LLC, have been snapping up Vistra stock in a bet that the massive boom in demand — partly fueled by power-sucking AI data centers — will only grow. That’s spurred shares to a more than 300% gain over the past 12 months, making the Texas-based firm the best performer in the S&P 500 Index — a benchmark it joined less than a month ago. Peers trailed, with utility stocks in the index returning about 10% over the same period.

“Power demand is extremely strong, and it’s being driven by the data center trade,” but Vistra’s mix of gas and nuclear power plants make it “a unicorn,” according to Guggenheim’s Shahriar Pourreza who assigned the stock its highest price target on Wall Street at $133.

After hitting an all-time high earlier in the week, shares sold off on Friday as Vistra detailed plans to add natural gas capacity in Texas. Investors are concerned this could be “the tip of an oversupply iceberg,” Pourreza wrote in a note to clients, but he views the changes as “somewhat modest.”

An array of utility companies are expected to benefit from the AI boom with data center power demand poised to more than double by 2030, according to Goldman Sachs’ estimates. But Vistra’s position as one of the few public independent power producers — a status that means it sells electricity at market prices, unlike regulated utilities — has left it in a league of its own and buoyed shares.

As Vistra is a direct participant in the market, “the clearest investment thesis is that wholesale power prices are going to increase,” Thomas Meric, an analyst with Janney Montgomery Scott, said in an interview.

Vistra’s roles as a big player in the surging Texas power market and — following the more than $6 billion acquisition of Energy Harbor Corp. — as a major owner of nuclear generation capacity are helping lure in investors. With the company’s nuclear fleet eligible for power-generation tax credits from the Inflation Reduction Act, it could also attract pacts from major AI players.

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Data centers are looking for round-the-clock clean power, and “nuclear plants are a very strong avenue for that,” Guggenheim’s Pourreza said. Investors are anticipating the company will be able to contract its plants directly with data centers, similar to an energy-matching agreement between Constellation Energy Corp. and Microsoft Corp, he added.

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Other key future catalysts would be the company’s first earnings-per-share guidance and a longer-term outlook from the company, Pourreza said.

Even after the run, Vistra’s stock screens relatively inexpensive compared to other ways to play the AI and data-center booms, according to Janney’s Meric. The company trades around 17 times the next year’s earnings, compared to Nvidia’s multiple of 37. Wall Street analysts are overwhelmingly positive, with 10 of the 11 surveyed by Bloomberg giving the shares a buy-equivalent rating.

Morningstar analyst Travis Miller, who has the lone sell recommendation on the stock, said the trends feeding the rally could falter. For one thing, growing renewable generation could squeeze legacy power producers in Texas.

“The market has gotten a little too overexcited,” Miller said. Current analyst price targets suggest a cool down may be ahead with an average of $108 implying a 12% gain over the next 12 months, and even Pourreza’s $133 Street high suggests a slower pace of gains.

But for adherents, including activist investor Loeb, the expansion of renewable energy is another reason to buy in. The intermittent nature of wind and solar power supports the case for legislation favoring natural gas plants, like Vistra’s, that are available in a pinch, he wrote in an April letter.

Vistra was one of his hedge fund’s top five winners in the first quarter, and Loeb cited the power demand from data centers and electric vehicles as another reason for long-term confidence.

“Vistra is in the pole position to capitalize on these trends,” he wrote. “We expect the discount applied to their assets to continue to narrow as their business becomes increasingly essential to serving domestic power demand.”

–With assistance from Naureen S. Malik.

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