As the construction of AI infrastructure accelerates, the gap between data center power demand and America’s ability to produce energy is becoming increasingly apparent.
By 2030, analysts expect data center power demand to skyrocket by 175 percent, roughly equivalent to adding another large nation’s power consumption on top of existing demand. Today, let’s take a look at some of the AI power stocks that could stand to benefit from this growing mismatch between supply and demand.
Constellation Energy
Although Constellation Energy (NASDAQ:CEG) isn’t an AI-focused energy startup, it has the advantage of already being an energy major. Operating a large portfolio of nuclear, solar, wind and hydroelectric assets, Constellation is the largest single green energy producer in the United States and accounts for about 10 percent of carbon-free power generation in the country.
Of particular note, where AI is concerned, is the fact that Constellation operates the nation’s largest fleet of nuclear reactors. Constellation’s AI strategy has focused on using these and its other generation assets to meet the needs of strategically positioned data centers.
Beyond its existing moat as a massive energy business and its shift to specifically focus on data centers, Constellation’s stock is supported by sector-beating profitability metrics. Over the last 12 months, the business has generated returns on invested capital and equity of 12.3 percent and 20.1 percent, respectively. In both cases, Constellation’s returns are more than twice the sector average. Net margin over the same period, meanwhile, has come in at a respectable 10.2 percent.
Another positive investors may want to consider about CEG is its dividend growth potential as it expands. Right now, Constellation yields a very modest 0.4 percent. The payout ratio, however, is just over 13 percent, leaving considerable room for management to push it upward over the coming years. This potential can be seen clearly in CEG’s trailing 3-year dividend growth rate of over 40 percent. Though Constellation has a short history of paying dividends, its status as a growing business that’s already well-established in the energy sector could set it up as a good long-term income stock.
NextEra
Like Constellation, NextEra (NYSE:NEE) is an established energy major. NextEra is both a large developer of renewable energy resources and the owner of Florida Power & Light, the single largest electrical utility in the United States.
NextEra has been focusing heavily on power generation for Alphabet, one of the largest AI hyperscalers and arguably the member of the Magnificent Seven that is likely to maintain the highest level of Capex on new data centers. Already, NextEra and Alphabet have contracted for 3.5 gigawatts of generation. Under a new agreement, the two businesses are also planning to develop several new data center campuses in the US with power generation provided by NextEra. The energy major has also agreed to about 2.5 gigawatts of mostly solar power for Meta to help the social media giant reach its net-zero emissions goals.
NextEra could also be an appealing option for value-oriented investors looking for AI power stocks. Many stocks with exposure to AI power demand have come to command very high valuations, but NEE is still trading at the comparatively reasonable level of 26.4 times earnings and 3.2 times book value. NEE’s dividend yield, meanwhile, stands at 2.7 percent. Between a solid utility base and agreements with two of the largest AI hyperscalers, NextEra could prove to be a solid AI power investment that also offers attractive pricing and strong current income.
Bloom Energy
For investors seeking a higher-risk play among AI power startups, Bloom Energy (NYSE:BE) may prove to be a promising stock. Bloom Energy’s business model revolves around selling on-site solid oxide fuel cells to power data centers. This model allows Bloom’s customers to put power generation in place and scale it as needed, solving some of the problems associated with connection to the traditional grid.
Bloom’s somewhat unique approach to the problem of supplying power to data centers is already resulting in rapid growth. In Q3, for instance, revenues rose by over 57 percent $519.0 million. While Bloom Energy is still operating at a loss, Q3’s net loss of $23.1 million was a significant improvement on the $42.6 million it lost in Q2. Gross profit margin also came in at 29.2 percent, up from 23.8 percent in the year-ago quarter. Bloom also signed a $5 billion agreement with Brookfield Asset Management during the quarter to build strategic AI infrastructure.
Although Bloom’s fuel cells themselves are quite interesting, the real value of the business may be found in its long-term service contracts. Each unit that Bloom sells generates upfront project revenue and a recurring stream of service revenue on the back end. As of Q3, that service revenue had risen to $58.6 million. As Bloom keeps installing more cells, though, recurring revenue could become a larger and larger part of its mix, creating an appealing and reliable base of ongoing revenue for the business.
So far, Bloom Energy’s growth potential has shown a remarkable capability to support rising share prices. Shares of BE are up more than 350 percent in the last 12 months, but the stock has only risen to about 6 percent above the average analyst price forecast. Though it’s difficult to argue that BE doesn’t trade at a premium price, Bloom Energy’s growth could justify the price tag over the long run.
Energy Transfer
A final honorable mention in the AI power space is midstream pipeline operator Energy Transfer (NYSE:ET). Standing to benefit heavily from the increased demand for natural gas that is likely to develop as more data centers are built, Energy Transfer could prove to be an under appreciated winner of the AI boom.
Despite growing interest in renewable energy sources for data centers, natural gas offers one of the most ready solutions to the problem of surging power demand. Natural gas plants are relatively quick to build and offer a way to meet data center demand while renewable energy infrastructure is coming online. As one of the largest midstream operators in North America, Energy Transfer could be in an excellent position to benefit from the expected rise in natural gas demand as more data centers turn to it as a fuel source.
ET may be particularly appealing to investors looking for immediate income from energy stocks. Energy Transfer has been well-known for its high dividend yield for many years and currently yields 7.8 percent. While investors should be aware that ET carries different tax implications than a traditional dividend stock due to trading as a master limited partnership, the extremely high yield it offers could be attractive to those who prioritize current income.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.