Integrated power generation business Vistra (NYSE:VST) surprised investors recently when its stock jumped by more than 10 percent going into the market open. The sudden upward move came after a punishing few months in which VST had fallen by more than 20 percent. Why is Vistra stock suddenly up so much, and could the trend continue to wipe out the losses of the last few months?
How a Deal With Meta Sent VST Soaring
The main cause of Vistra’s recent jump was a new 20-year power purchase agreement from Meta (NASDAQ:META). Under the terms of the agreement, Meta plans to purchase electricity generated from two existing nuclear power plants in Ohio and one in Pennsylvania. Like other AI hyperscalers, Meta is exploring nuclear energy as a solution for the growing electricity needs of data centers.
In addition to simply giving Vistra an opportunity to sell electricity, the agreement with Meta will allow it to expand its existing facilities and extend their useful lifespans. As noted in Vistra’s own press release, over 15 percent of the new contracted capacity will come from expanding overall generating capacity. Although Meta will begin buying power from the plants this year, the upgrades Vistra plans to make will be incremental and aren’t expected to be fully online until 2034.
Vistra wasn’t the only beneficiary of Meta’s new push toward nuclear energy, as small modular reactor startups Oklo (NYSE:OKLO) and TerraPower also secured agreements with Meta. While TerraPower is privately owned, Oklo shares surged more even than VST when Meta made its new agreements public. Unlike Vistra, however, Oklo will still need to develop its reactors and isn’t expected to bring any power online for Meta before 2030. Vistra, on the other hand, is selling power from existing nuclear assets that have become more valuable with the signing of the Meta agreement.
At 59x Earnings Is Vistra Overvalued?
At first glance, Vistra’s share prices seem to be quite high at 59.4 times trailing 12-month earnings, 2.6 times sales and over 135 times operating cash flow, as well as nearly 21 times book value. For reference, the sector average P/E is just 15.8, less than one-third of the premium to earnings that VST commands.
It’s interesting to note that there appears to be a sharp split between analysts and institutional investors when it comes to VST’s valuation. Even with its recent bump, Vistra’s current price of $166.37 is almost 40 percent below the analyst consensus price target of $232.30. The consensus rating for the stock is also an overwhelming buy, with 14 buy ratings compared to just two holds and one sell.
Despite this analyst bullishness, institutional investors have been selling more VST than they’ve been buying since May of last year, and the last six months have seen over three times as much institutional selling activity as buying activity. Though the latest news from Meta obviously hasn’t had time to show up in reported institutional activity, the strong institutional selling up to now may not bode well for Vistra’s long-term outlook.
Vistra’s Net Income Down But Hope Ahead?
Although the new agreement with Meta is promising, it’s worth taking a look at Vistra’s recent performance, as the stock has been struggling for quite some time. In Q3, Vistra reported net income of just $652 million, down from $1.84 billion in Q3 of 2024. While this net income drop may seem drastic, it’s important to take into account that it’s mainly attributable to unrealized differences in derivative positions that Vistra uses as hedges.
Owing to the effect of these derivative positions on net income, Vistra’s adjusted EBITDA from ongoing operations may present a somewhat more useful measure of the business’s performance. This metric has been much smoother over the last year, with Q3’s ongoing operations EBITDA coming in at $1.58 billion against $1.44 billion in the year-ago quarter.
In terms of profitability, Vistra has delivered modest net margin and return on invested capital over the last 12 months, with both metrics falling just over 5 percent. Return on equity, however, has been enormously more positive at 23.2 percent. This has been something of a consistent feature of VST of late, as ROE has remained in double-digit territory through most of the last two years.
Vistra is also investing in new energy projects that will increase its ability to generate power. With new projects coming online and the three nuclear plants given extended lifespans by the Meta agreement, Vistra could be well-positioned to take advantage of the growing need for power associated with data centers, EV growth and other new demand sources. Of particular note is a 405 MW solar project Vistra is undertaking in Illinois to supply power to Microsoft (NASDAQ:MSFT), another of the largest names in the AI field.
Is VST a Buy Now?
Although VST looks expensive on an earnings basis, it’s important to keep in mind the difference in net income made by its positions in derivative products. Though this still leaves Vistra looking more expensive than the sector in general, it appears to go some way toward smoothing out some of the more extreme aspects of its valuation.
Vistra has also developed a strong habit of buying back its own shares. Since 2021, Vistra has reduced its outstanding share count by about 30 percent, and management still has about $2.2 billion in remaining repurchase authorizations. These remaining buybacks, representing over 10 percent of the business’s current market cap, are expected to be completed by the end of next year.
Considering the rapid growth of demand for power, Vistra’s new agreement with Meta and its longstanding habit of using cash generated in its business to reward shareholders through buybacks, VST could be a moderate buy in today’s market. This is especially true when one takes into account the expected annual EPS growth of about 19 percent that’s expected to prevail over the next few years. With this earnings growth, Vistra could justify its seemingly high price tag and deliver respectable returns for shareholders.
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.