The unrelenting energy demand from Big Tech in the AI era has driven Constellation Energy (NASDAQ:CEG) stock up by more than 85% year to date, peaking at an all-time high in May. Constellation, the largest nuclear plant operator in the U.S., is now a top performer in the S&P 500 Utilities Select Sector ETF.
Wall Street anticipates that Constellation will secure “collocation” deals with major tech companies, allowing them to build data centers near Constellation’s nuclear plants to access carbon-free power. CEO Joe Dominguez mentioned in a recent media roundtable that the company is “deep in discussions with several interested parties.”
Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and Meta (NASDAQ:META) are expected to invest a combined $200 billion this year in cloud and AI projects, including data center construction. Research from McKinsey & Co. suggests that power demand from U.S. data centers will more than double by 2030 due to AI usage.
Independent power providers like Vistra Corp (NYSE:VST) and NRG Energy (NYSE:NRG) have also benefited from this growing energy demand, with their stocks up approximately 130% and 55% year to date, respectively. However, analysts highlight Constellation’s unique position, given its extensive fleet of 21 nuclear reactors, which can help Big Tech meet carbon emissions goals.
With nine Buy, five Hold, and zero Sell ratings from analysts, Constellation stands out in the utility sector. “Nuclear plant operators are uniquely capable of supporting data centers that need 24/7 carbon-free power,” said James Thalacker, an analyst at BMO.
Earlier this year, Amazon purchased a $650 million data center campus in Berwick, PA, adjacent to a nuclear plant operated by Talen Energy. This marked Amazon’s first agreement of its kind, with the data center powered by the nearby nuclear facility.
Analysts see Constellation’s plants in Illinois and Pennsylvania as ideal for similar Big Tech partnerships. Another advantage for Constellation is its unregulated status, allowing it to set energy rates independently of regulatory approval.
“Constellation is more of an energy play,” noted Neil Kalton, senior equity analyst at Wells Fargo. “Their revenues are influenced by market power prices.”
The company also benefits from the Biden Administration’s Inflation Reduction Act, which incentivizes the green energy transition. Kalton pointed out that Constellation produces power at about $25 per megawatt hour, while the Act sets a floor price around $45 per megawatt hour, with no cap on potential profits.
“There’s significant interest from data center developers in long-term contracts at premium prices,” Kalton added. However, analysts caution that rapid price hikes could attract political scrutiny.
“A gradual rise in power prices is ideal, but a sudden spike could draw unwanted political attention,” Thalacker wrote in a recent note.
Since its 2022 spin-off from Exelon (NASDAQ:EXC), Constellation has focused on renewables and hydroelectric energy, buying back shares and increasing its dividend. In 2023, Constellation partnered with Microsoft to reduce emissions at one of its data centers through carbon-free energy matching, and it has signed renewable energy agreements with companies like PepsiCo, McCormick, and Best Buy for its solar project in Texas.
During its latest quarterly results call, Constellation forecasted annual earnings per share growth of 10% through the rest of the decade. If power prices rise or anticipated Big Tech deals materialize, “that 10% could become significantly higher,” Kalton said.
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