Utility companies have a long history of providing reliable energy, a service we undoubtedly depend on. However, growing demand is putting new pressure on the network and highlighting the need for expansion. The source of this new demand is hardly a secret – AI technology is booming and requires large-scale data centers to support its software and applications. And these data centers are notorious energy consumers.
This has allowed utility companies to begin expanding their production capacity and moving toward new energy technologies. Nuclear power, alternative energy sources, renewable energy: all are getting more attention as data center expansion continues. The result is a wave of opportunity for investors in utility stocks.
RBC's Shelby Tucker, a 5-star analyst ranked in the top 2% of Street equity professionals, highlights this dynamic in a recent report: “We expect load growth estimates to be revised upward, following trends established throughout 2024. Demand, driven by the growth of AI data centers, has combined with strong reshoring of the manufacturing industry to drive commercial and industrial load growth to unprecedented levels. seen from the early 2000s… Ultimately, we expect utilities whose service territories we will see increased interest from high-load customers to continue to update IRPs and increase forecasts load, leading to a potential need for additional resources.
Against this backdrop, Tucker focused on two utility stocks that are particularly well-positioned to benefit from this trend, thanks to their strategic investments in data center infrastructure. We passed them through the TipRanks Database to see what other Street experts think of his picks.
AES company(AES)
The first utility stock we'll look at is AES, a power company with a large portfolio of generating capacity and other assets, as well as a global presence. From its base in Arlington, Virginia, across the Potomac from Washington, AES operates a network that stretches across the Americas and extends into Europe and Asia. The company is focused on developing and deploying green energy generation technologies and capabilities, carbon-free electricity, and creating smart grid technology and digital solutions that will meet the ongoing needs of the sector electric utilities as a business. All of this means that AES has a solid foundation to match its $9.5 billion market cap and more than $12 billion in annual revenue.
AES's recent activity includes power plants in Brazil and Argentina, power generation facilities in the Netherlands and the United Kingdom, coal-fired power plants in India, and power generation capacity in the scale of public services in the United States. The company prides itself on its ability to adapt its facilities to local needs – and that brings us to connecting to data centers. In the third quarter of this year, AES added 900 megawatts of new electrical load growth to its AES Ohio operations, to provide supply to meet growing data center demand.
Data centers are not the only source of energy demand, and AES has many new programs under its belt. Along with expanded operations in Ohio, the company also entered into 2.2 gigawatts of new power supply contracts in the third quarter, including 1.3 gigawatts of renewable energy under power supply agreements in the long term. Also in the third quarter, AES reported having a significant list of new projects in the pipeline that are expected to go live before the end of this year. The company is also streamlining its operations by conducting asset sales, with proceeds of up to $3.5 billion through 2027.
All this activity generated nearly $3.3 billion in revenue for AES during 3Q24, the latest reported period. That total revenue fell 4% year over year and missed forecasts by $170 million – but the company's profits for the quarter beat estimates. Non-GAAP EPS came in at 71 cents per share, 7 cents better than expected.
For RBC's Tucker, the main strengths of this title are the company's leading position in its niche as well as its strong project portfolio. He writes: “We view AES as a leader in the field of renewable IPP development, primarily due to their existing pipeline and relationships with large data center customers. As one of the largest enterprise PPA developers, we expect the company's 66 GW pipeline and 12.7 GW backlog will largely serve data center customers building the new wave of projects. The company also made clear that although input costs have increased in recent months, increasing competition for energy supplies has led to PPP prices exceeding input costs, leading to higher margins.
Expressing his position in quantifiable terms, Tucker rates AES as Outperform (Buy), with a price target of $17, suggesting a one-year upside potential of 28%. (To see Tucker's track record, Click here)
The 11 recent reviews here include 9 to Buy and 1 to Hold and Sell, each, for a Moderate Buy consensus rating. AES stock is priced at $13.29 and its average target price of $20.56 implies shares will gain 55% in the coming months. (See AES Stock Market Forecast)
Brookfield Renewable Partners(BEP)
Now let's move on to Brookfield Renewable Partners, the renewable energy company that operates as a public entity under the larger Brookfield Asset Management umbrella. Brookfield Renewable Partners holds a portfolio based, as the company is named, on renewable energy, with a focus on distributed and sustainable energy projects. The Company's portfolio is comprised of a wide range of green energy generation assets, including wind, solar and hydroelectric installations. These assets operate at utility scale and are distributed across North and South America, as well as Europe and Asia. Brookfield Renewable Partners boasts that its operating capacity exceeds 35,000 megawatts and that it has an additional 200,000 megawatts under development.
This company is always striving to proactively expand and improve its asset portfolio. A quick look at the highlights from the recent 3Q24 report will confirm this. During the third quarter of this year, BEP commissioned approximately 1,200 megawatts of new renewable energy capacity, and the company expects to reach a record 7,000 megawatts of new electricity capacity for the full year . The company advanced its business initiatives and secured contracts to provide “an additional 6,100 gigawatt hours per year of production.” To support this activity, the company could count on $4.6 billion in liquidity at the end of the third quarter. The company attributes its success to growing demand, particularly in the technology sector – and, within this, the rapid expansion of data centers and the development of AI.
Looking at the financial results, we see that BEP reported revenue of $1.47 billion in the third quarter, a total up almost 25% year over year and $40 million better than foreseen. However, the company ultimately missed the estimates; quarterly funds from operations (FFO) of 42 cents per share was a penny less than expectations.
This shortfall hasn't bothered RBC, and Shelby Tucker highlights both BEP's scale and expansion: “Over the past five years, BEP has more than doubled its clean energy contracts with companies customers, to reach more than 20 TWh/year (which represents approximately ~30% of its total contracted volumes), and management expects this to double to reach 44 TWh/year in 2028. Big Tech represent a minority of what is currently under contract, but management expects large technology will account for the majority of volume growth for enterprise customers in the future. Last year, the company committed to supplying 35 TWh (delivered over several years) to large technology companies, representing approximately 78% of contracts with enterprise customers and 70% of new contracts with all buyers.
These comments support an Outperform (Buy) rating on BEP, while the $31 price target points to a one-year gain of 26% for the stock.
These stocks earned a Strong Buy consensus rating, based on 9 reviews including 7 Buys and 2 Holds. The stock currently trades at $24.54 and its average target price of $31.11 closely matches RBC's outlook. (See BEP Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the analysts featured. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
