These 3 utilities stocks are set to benefit the most from the AI boom as demand for electricity surges, according to a $47 billion firm
- AI and data centers are driving up electricity usage in the US after a decade of flat demand.
- As a result, the utilities sector is performing strongly, especially independent power producers.
- IPP stocks like NRG, CEG, and VST will benefit the most from AI, says one portfolio manager.
Nvidia and other Magnificent Seven stocks might be all the rage right now on, but big tech and semiconductors aren't the only areas of the market benefiting from the AI boom. Investors are pouring into utilities stocks as data centers drive outsized demand for electricity.
The technology behind chatbots and large language models is incredibly power hungry. A simple ChatGPT conversation uses up to ten times more electricity than a traditional Google search, and data center energy usage is expected to increase 160% by 2030, according to Goldman Sachs Research. This is big news for the US utilities sector, which has experienced essentially flat demand growth over the last decade.
Amid this backdrop, the utilities sector has performed strongly. The MSCI ACWI Utilities index returned 7.2% in the last quarter, outperforming all other sectors in the index.
But the impact of AI on utilities companies isn't uniform. Some areas stand to benefit more than others, according to Steve Nguyen, head of Causeway Capital's utilities and fundamental research. The investment management firm oversees $47 billion in assets.
"Everyone is looking for the next quick play on AI and data centers, but the fundamental impact on most utilities is more nuanced," Nguyen said in a recent note.
US independent power producers (IPPs) are positioned to benefit the most from the increased demand for power in the coming years. These companies operate independently of national power supply companies, selling power to deregulated electricity markets instead. Deregulated markets are highly sensitive to changes in power prices, and rising prices have boosted company profits.
This price sensitivity has historically led IPPs to trade at a discount to other utilities. These lower valuations offer more opportunity for multiple expansion in light of the rise of AI and data centers, Nguyen said.
And as data centers proliferate, many are signing Power Purchase Agreements (PPAs) with IPPs. Increasing contract prices for these PPAs are another driving factor behind greater IPP company profits.
On the other hand, Nguyen anticipates regulated US utilities firms to experience more subdued growth going forward. Although regulated utilities will see increased returns on their land and other owned assets and subsequently higher revenues, they are limited in the rate increases that they can pass along to customers. Regulated utilities are also constrained by funding availability. Although historically low valuations for regulated utilities still provide some room for expansion, Nguyen doesn't expect data center demand to drive significant increases in their earnings per share growth.
Nguyen points out these three IPP utilities stocks in particular that have doubled or tripled in value in the last year.