The huge surge in demand for artificial intelligence power in the energy sector may have just begun, with analysts saying three stocks in particular have even more upside potential next year. Constellation Energy, Vistra Corp. and Talen Energy soared in 2024 as investors realized that the independent power producers had nuclear and gas assets that will be in high demand by the tech companies building data centers to power AI. Vistra has more than tripled its value and is the second-best performing stock in the S&P 500 this year. This means the company has overtaken the chip company Nvidia and is only behind Palantir Technologies. Constellation has nearly doubled, making it the 10th best-selling stock right behind Broadcom. Talen Energy, not yet a member of the S&P, has also more than tripled this year. The rally is still in a “very early phase,” said Shahriar Pourreza, head of energy and utilities at Guggenheim Securities. “They’re probably in the second inning right now,” Pourreza said. Investors haven’t even begun to “scratch the surface of what the demand for electricity will be” from technology companies expanding AI, he said. More contracts After this year’s rally, utilities will need to sign more power contracts with data centers in 2025, said Paul Zimbardo, head of energy and utilities at Jefferies. Only a few agreements have been announced so far. Constellation announced a groundbreaking contract in September to restart the Three Mile Island nuclear power plant in Pennsylvania as part of an agreement with Microsoft. Talen agreed in March to power an Amazon data center using electricity from its Susquehanna nuclear power plant in Pennsylvania. But the best-performing stock of the three, Vistra, has yet to announce any similar deals. “Investors will be patient, but you really need to start putting points on the board next year and I think they will,” Zimbardo said. “There is a lot of upward potential for Vistra and Talen. Constellation – more is priced in,” said the analyst. A deal announced by one company will likely shift shares in the other two, Pourreza said. For example, Vistra outperformed Constellation when the Three Mile Island reboot was announced, he said. “Deals will be announced in the near future, but who announces them is less important to me because they will all push the sector up, whoever announces them,” Pourreza said. Vistra’s Top Pick Pourreza’s top pick is Vistra. The stock is cheaper than Constellation even after its rally to the top of the S&P 500, he said. It has both nuclear and natural gas-powered assets that are attractive to data centers. “I like Vistra because I don’t have to bet whether the next deal will be a nuclear plant or a gas plant,” Pourreza said. Guggenheim has a 12-month price target for Vistra of $177 per share, representing about 26% upside potential from current levels. Jefferies sees 19% upside potential with a price target of $167. Talen has a gas portfolio in Pennsylvania that may also benefit from data center demand, Zimbardo said. Jefferies sees Talen upside of 36% from current levels and a price target of $269. The Guggenheim target of $246 per share implies an upside potential of about 25%. Analysts are divided on Constellation. While Jefferies is spinning off Baltimore-based Exelon Corp. As a Hold, Guggenheim still considers Constellation a Buy with a price target of $328, representing approximately 44% upside potential from the stock’s price today. Of course, all three face risks. The Federal Energy Regulatory Commission on November 4 rejected Talen’s request to increase the amount of electricity the Susquehanna nuclear power plant can supply to the Amazon data center. Constellation and Vistra burst into the news along with Talen. “The risk is that the fights you see at FERC will cripple the data centers,” Pourreza said. They may not want to deal with a “squabble between the cable companies and the utilities,” he said, referring to the transmission and distribution companies and the independent power producers. The risk is that data center developers will look elsewhere for solutions, he said. Amazon recently announced investments in small nuclear reactors. Exxon is interested in building a gas plant for a data center. “The whole danger is that the data centers will bypass companies like independent power producers Talen, Vistra and Constellation,” said Pourreza, the Guggenheim analyst.
Three energy stocks have soared on AI demand – the rally may just be beginning
