2 Magnificent AI Stocks to Invest in the Future of Energy

Global electricity demand is expected to double by 2050, largely due to the magnitude of China’s energy transition, according to the International Energy Agency’s new World Energy Outlook 2024. The agency increased its electricity demand forecasts by 6% compared to last year, attributing the higher demand to the expansion of new data centers and increased usage of air conditioning units, alongside growth in China.

Amid this surge, two power companies - Constellation Energy (CEG) and Dominion Energy (D) - are positioning themselves to lead the charge in meeting the rising energy needs of the future. Both companies have recently inked major power supply agreements with Magnificent Seven companies. These partnerships are also pivotal in aligning with the increasing focus on sustainability and the shift towards cleaner energy sources.

This article explores why CEG and D are poised for long-term growth and how their strategic partnerships with leading tech firms make them excellent investments for those looking to invest in the future of energy.

1. Constellation Energy

Constellation Energy Corporation (CEG) is a Maryland-based utility that generates and sells electricity in the United States. CEG was established as an independent, unregulated company in January 2022, when it was spun off from Exelon (EXC), incorporating Exelon Generation’s nuclear plants and other generating assets. 

Constellation owns approximately 33,100 megawatts of generating capacity. Notably, Constellation’s nuclear-powered electricity generation capacity totals 22,100 megawatts, accounting for 67% of its overall capacity. Its market cap currently stands at $85.16 billion.

As the leading producer of carbon-free electricity in the U.S., CEG generates 10% of the country’s carbon-free electricity through its nuclear, wind, solar, and hydro units. It has the largest nuclear fleet in the U.S.

Shares of Constellation Energy have skyrocketed around 131% year-to-date, significantly outperforming its utilities sector peers, as well as the broader market. 

CEG Soars After Power Supply Deal With Microsoft

On Sept. 20, Constellation Energy experienced its largest-ever percentage increase, surging over +22% following the announcement of a 20-year power purchase agreement with Microsoft (MSFT). This agreement will facilitate the restoration of service to one of the units at its Three Mile Island nuclear power plant in Pennsylvania and ensure its operation for decades.

Under the agreement, Microsoft will buy energy from the renewed 835 MW reactor to support its objective of matching the power consumption of its data centers in PJM with carbon-free energy.

Constellation says this deal represents its largest-ever power purchase agreement. While financial details were not disclosed, the company stated its intention to finance the project independently, without seeking state or federal support. Also, CEG said that it expects Three Mile Island to resume service in 2028, and intends to seek license renewal to extend the plant's operations to at least 2054.

Pennsylvania Governor Josh Shapiro reportedly sent a letter to grid operator PJM Interconnection, requesting that the Three Mile Island reactor be “allowed to come online as quickly as possible rather than waiting in the queue as if they were an entirely new development.”

AI-led electricity sales are expected to bolster Constellation's top-line growth, and are likely to increase net income even more rapidly due to the pricing power that comes with high demand. The deal was well-received on Wall Street, prompting analysts from Wells Fargo, KeyBanc, Morgan Stanley, Evercore ISI, Jefferies, Barclays, BofA, BMO Capital, and UBS to raise their price targets on the stock.

CEG Q2 Results and Guidance

Constellation Energy announced its financial results for the second quarter of fiscal 2024 on Aug. 6. Constellation reported a GAAP net income of $2.58 per share, totaling $814 million, compared to $2.56 per share, or $833 million in the same quarter of the previous year. The figure topped Wall Street’s consensus by $0.79. Non-GAAP adjusted operating earnings for the quarter stood at $1.68 per share, or $531 million, compared to $1.64 per share, or $535 million, in the second quarter of 2023. Revenue was relatively flat year-over-year at $5.48 billion, falling short of estimates by $75 million.

Rregarding nuclear operations, the company stated, “Our nuclear fleet, including our owned output from the Salem and South Texas Project (STP) Generating Stations, generated 45,314 gigawatt-hours (GWhs) in the second quarter of 2024, an increase from 41,895 GWhs in the second quarter of 2023. Excluding Salem and STP, our nuclear plants at ownership achieved a 95.4% capacity factor for the second quarter of 2024, up from 92.4% in the second quarter of 2023.”

Constellation Energy maintains a strong, investment-grade balance sheet, and repurchased $500 million worth of its shares during the second quarter, totaling $1 billion in cash spent on buybacks this year. Management indicated that they possess significant strategic flexibility to deliver additional benefits to shareholders, either through organic growth that meets return thresholds or by investing directly in the company.

CEG’s annualized dividend of $1.41 per share translates to a forward yield of 0.52%, which is well below the sector median of 3.52%. However, the company has a dividend payout ratio of only 18.13%, suggesting significant potential for future dividend increases.

Looking ahead, Constellation lifted its 2024 forecast for adjusted operating earnings to $7.60-$8.40 per share from the previous range of $7.23-$8.03 per share, citing strong commercial performance to date. Also, management announced plans to deploy an additional $1.8 billion in capital expenditures through 2025, highlighting the growth potential of the nuclear energy company. In addition, the company forecasts a base EPS growth of “at least 10% to at least 13%” through 2030.

Analysts tracking the company forecast a 58.68% year-over-year surge in its earnings to $7.95 per share for fiscal 2024. Simultaneously, Wall Street anticipates a 15.43% year-over-year decline in CEG’s revenue to $21.07 billion for FY24.

CEG’s forward EV/EBITDA multiple stands at 20.76x, representing an 82% premium compared to its utilities peers. At the same time, its forward adjusted PEG ratio is at 1.72x, below the sector median of 2.88x, suggesting that the market has likely factored in execution risks concerning the company’s growth outlook.

What Do Analysts Expect For CEG Stock?

On Oct.17, JPMorgan initiated coverage of Constellation Energy with an “Overweight” rating and a $342 price target, as the firm began coverage of independent power producers with a positive overall outlook. JPMorgan identified structural tailwinds such as manufacturing onshoring, broader electrification trends, and data center development as underpinning a “paradigm shift” in power demand.

Constellation Energy stock has a consensus “Moderate Buy” rating. Among the 18 analysts covering CEG, 11 recommend a “Strong Buy,” and seven assign a “Hold” rating. The mean target price for CEG stock is $280.70, indicating an upside potential of about 4% from its Friday closing price.

2. Dominion Energy

With a market capitalization of $50.18 billion, Dominion Energy (D) generates and distributes energy primarily in Virginia and South Carolina. Despite its limited geographic reach, the company ranks as one of the largest utility providers in terms of generation, delivery, and market capitalization in the U.S. 

D operates through three main business units: Dominion Energy Virginia, Dominion Energy South Carolina, and the smaller Contracted Energy segment. At the end of 2023, it had about 30 gigawatts of peak generation capacity and corresponding delivery infrastructure.

Dominion Energy stock has gained about 27.5% year-to-date.

Dominion Energy Climbs on Amazon Deal

On Oct. 16, shares of Dominion Energy rose more than +5% following the announcement that Amazon Web Services (AWS), Amazon’s subsidiary in cloud computing, had signed a Memorandum of Understanding (MOU) with the company to explore the development of a small modular nuclear reactor (SMR) near Dominion’s existing North Anna nuclear power station.

As power demand surges at an unprecedented rate in Virginia and other U.S. regions, utilities, state and federal agencies, and leading technology companies are exploring SMRs as a viable solution for delivering reliable, carbon-free power. An SMR is an advanced nuclear reactor with a smaller footprint, enabling construction closer to the grid. These reactors can be built more quickly than traditional reactors, allowing for faster commissioning.

The MOU between Dominion Energy Virginia and Amazon outlines the companies’ collaborative efforts to explore innovative approaches for advancing SMR development and financing, while also aiming to mitigate potential cost and development risks for customers and capital providers.

“We see the need for gigawatts of power in the coming years, and there’s not going to be enough wind and solar projects to be able to meet the needs, and so nuclear is a great opportunity,” said Matthew Garman, CEO of AWS. “Also, the technology is really advancing to a place with SMRs where there’s going to be a new technology that’s going to be safe and that’s going to be easy to manufacture in a much smaller form.”

Research from S&P shows that over the past five years, 81 data centers have connected to D’s network, requiring 3.5 GW of electricity. AWS anticipates that the new SMRs will generate at least 300 megawatts of power for the Virginia region, allowing Dominion to further benefit from AI-driven electricity demand.

More News for D Stock

On Oct. 15, Dominion Energy’s Virginia unit announced plans to address the state’s increasing power demand through a substantial expansion in clean energy resources. The company’s 2024 Integrated Resource Plan, submitted to utility regulators in Virginia and North Carolina, outlined a strategy for enhancing grid reliability while managing unprecedented growth in power consumption.

Dominion said that nearly 80% of the incremental power generation in its plan over the next 15 years will be carbon-free. This includes 3,400 MW of new offshore wind in addition to the 2,600 MW Coastal Virginia Offshore Wind project already under development, 12,000 MW of new solar compared to the current 4,750 MW in operation or under development, 4,500 MW of new battery storage, and small modular nuclear reactors starting in the mid-2030s.

How Did Dominion Energy Perform in Q2?

Dominion Energy released its most recent quarterly earnings report on Aug. 1. In Q2, Dominion Energy reported a GAAP net income of $572 million, or $0.65 per share, compared to a net income of $583 million, or $0.67 per share, in the year-ago quarter. The figure topped analysts’ expectations by $0.09. 

Also, D posted non-GAAP operating earnings of $563 million, or $0.65 per share, which included a $0.03 benefit from better-than-normal weather in its utility service areas, up from $310 million, or $0.35 per share, for the same period in 2023. The company’s operating revenue grew 10.1% year-over-year to $3.49 billion, but missed estimates by $240 million.

The company connected nine new data centers year-to-date through July, aligning with its projections to connect 15 data centers in 2024. Management observed that growth is rapidly accelerating, fueled by an increase in the number of requests, the size of each facility, and the speed at which each facility ramps up to full capacity.

Notably, D is a large and financially stable utility provider, with credit ratings of BBB+ from S&P and Baa2 from Moody’s.

Looking forward, the company reaffirmed its 2024 operating earnings guidance range of $2.62 to $2.87 per share. Management indicated that in the second half of the year, they anticipate facing challenges from higher-than-budgeted short-term interest rates and backloaded O&M expenses, positioning the company to achieve the midpoint of the guidance range. D also reiterated its 2025 operating earnings per share guidance between $3.25 and $3.54, and maintained its forecast for an annual operating earnings growth rate of 5% to 7% through 2029.

Analysts tracking the company forecast a 38.19% year-over-year increase in earnings to $2.75 per share for fiscal 2024, with revenue anticipated to grow 5.01% from the previous year to $15.11 billion.

D’s dividend was reduced from $0.94 per share to $0.63 per share following the third quarter of 2020. Since then, the dividend was raised to $0.6675 per share at the start of 2022, and has remained at that level to the present. Nevertheless, the company has consistently made distributions, with the most recent payout in September marking its 386th consecutive dividend to shareholders. Based on current share prices, Dominion Energy is trading at a dividend yield of 4.46%, significantly higher than the sector median of 3.51%.

In terms of valuation, the stock is trading at 21.62 times forward adjusted earnings, which represents a modest premium compared to the sector median of 17.99x and its own five-year average of 18.41x. When it comes to the forward EV/EBITDA multiple, the stock is trading at 13.06x, slightly above the sector median of 11.41x and close to its five-year average of 12.92x. I believe the premium is justified, given the company’s role in the AI ecosystem.

What Do Analysts Expect For D Stock?

On Sept. 19, Jefferies analyst Julien Dumoulin-Smith started coverage of Dominion with a “Hold” rating and a price target of $58. Domestic utilities are often seen as “boring bond proxies by many, but the sector is as exciting as it has been in decades now,” the analyst told investors in a research note. Further, the firm states that factors such as data center demand, reshoring, energy transition, political uncertainty, increased weather events, expanding wildfire exposure, and an uncertain economic backdrop present “tremendous opportunities as well as risks for shareholders.”

Analysts have a consensus rating of “Hold” on Dominion Energy stock. Of the 16 analysts in coverage, three recommend a “Strong Buy,” while 13 suggest a “Hold.” Notably, D’s current stock price is approximately on par with the Street-high price target of $60.00. However, if the company’s fundamentals continue to benefit from its strategic focus on AI-related growth, analysts are likely to adjust their price targets accordingly.