The utilities sector saw a significant uptick in 2024 as investors jumped on the bandwagon of the growing artificial intelligence craze. Travis Miller, an energy and utilities strategist at Morningstar, notes that while there are enticing prospects, they require a bit of digging. The previous year witnessed a nearly 20% rise in the sector, with companies like Vistra Corp. and Constellation Energy leading the charge. These firms are seen as pioneers in powering AI and data centers. Vistra’s stock skyrocketed by almost 260% in 2024, with Constellation not far behind at over 90%. Talen Energy also benefited immensely, with shares soaring by more than 200%.
Despite these impressive gains, Miller cautions that the market might have become overheated for some of these energy providers. He expresses concern over the inflated valuations of unregulated power producers compared to their long-term growth potential. Of the main AI-focused players, Vistra stands out as the only one yet to announce a formal contract to supply nuclear power to data centers. On the other hand, Talen and Constellation have successfully struck power deals with big names like Amazon and Microsoft, respectively.
For investors who are seeking a blend of income and growth, the mid-cap utility space might offer the best opportunities. According to Miller, even a modest demand growth can significantly boost earnings for mid-cap companies. These stocks are currently undervalued and don’t fully reflect their potential, especially if they secure a few data center contracts. While large-cap utilities need a slew of projects to create impact, small-cap companies face the hurdle of financing risk as they expand infrastructure. With interest rate cuts uncertain in 2025, this could pose a challenge for smaller players.
Miller highlights that utilities undertaking massive projects often fall short or run over budget, hurting investor returns. He recommends focusing on companies capable of executing efficiently and minimizing their execution risks as data center growth becomes more prominent. Three companies that fit this criterion, according to Miller, are NiSource, WEC Energy, and Evergy.
NiSource enjoyed a 38% rise in stock value in 2024 and maintains a dividend yield of 3%. Out of 16 analysts covering NiSource, 14 rate it as a buy or strong buy, projecting a 6% price increase. The Indiana-based utility is set to provide energy to a new Microsoft data center in the state, a project worth $1 billion, which offers substantial growth potential.
WEC Energy, another player in the mid-cap arena, saw its shares increase by nearly 12% in 2024. With a dividend yield of 3.8%, WEC supplies energy to a data center expansion in Wisconsin backed by a $3.3 billion Microsoft investment. Eleven out of 19 analysts rate it a hold, with a consensus predicting about 7% upside in stock value. Both NiSource and WEC Energy benefit from using natural gas to generate power, a market that is gaining strength as gas prices remain low.
Lastly, Evergy, headquartered in Kansas City, is also gaining attention. The company is seen to have significant growth potential from its data center developments. It has secured deals with giants like Google and Meta Platforms and will supply power to Panasonic’s electric vehicle battery plant. These projects sum up to over 750 megawatts of load. Evergy’s shares rose nearly 18% in 2024, boasting a dividend yield of 4.4%. Analysts’ opinions are varied, with eight out of 14 giving it a buy or strong buy rating. The consensus sees a more than 7% increase from current levels.
