Shares of Constellation Energy (NASDAQ: CEG) rallied 16.8% in May, according to data provided by S&P Global Market Intelligence. Powering the utility's strong performance were its first-quarter results and the growing optimism surrounding artificial intelligence (AI)-driven power demand growth.
An AI-powered boost ahead?
Constellation Energy reported strong first-quarter results in early May. The utility generated $1.82 per share of adjusted operating earnings. That was up from $0.78 per share in the year-ago period. The company benefited from higher output from its power generation fleet, supportive energy policies, and strong performance in its commercial business.
That strong performance gave the company the confidence to reaffirm its full-year outlook. It also enabled the utility to increase its share repurchase program by $1 billion. Constellation Energy repurchased more than $500 million of its shares in the first quarter, boosting its total repurchases to $1.5 billion since 2023.
Constellation Energy is growing increasingly optimistic about the future. Support for nuclear energy is rising, fueled by the need for a clean energy source to power electric vehicles, heavy industry, and emerging technology like AI. Data centers that support AI applications use 7 times more power than traditional facilities. That powers the view that data centers in the U.S. will grow their energy consumption by 6.5% to 7.5% by 2030 and consume 8% of all the power produced in the country.
The company is looking to tap into this opportunity by extending the life of its existing nuclear power plants and exploring opportunities to locate next-generation nuclear reactors at its existing sites. Constellation is negotiating agreements with large technology companies to supply power to their data centers from its nuclear facilities. Those agreements would give it more visibility into future earnings growth.
Is the utility stock a buy after its recent surge?
With last month's surge, shares of Constellation Energy have more than doubled over the past year, powered by its rising earnings and AI optimism. The company's surging stock price has driven down its dividend yield (recently 0.7% compared to 1.3% for the S&P 500) while pushing up its valuation. It now trades at a higher forward P/E ratio (more than 26 times) than the S&P 500 (21.5 times) and its closest utility peers (between 17 and 22.5 times).
While Constellation Energy has strong growth prospects, especially if AI accelerates demand for nuclear energy, investors might want to wait for a pullback before buying its stock. Several other utilities have similarly strong growth prospects and trade at much lower valuations. Because of that, they could deliver higher total returns over the long term compared to Constellation Energy.
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy. The Motley Fool has a disclosure policy.
