Is This Breakout Utility Stock a Hidden Gem in AI Infrastructure?

In the fast-paced artificial intelligence (AI) world, utility companies are the powerhouses behind the scenes, fueling the data centers that propel AI forward. The massive computing power required to train AI models highlights that AI and energy are intertwined. Without a steady flow of energy, AI's potential takes a hit – basically, No Energy, No AI. According to Wells Fargo (WFC), AI data centers alone are expected to add about 323 terawatt hours of electricity demand in the U.S. by the decade's end.

Located in the heart of Virginia's thriving data center scene, Dominion Energy, Inc. (D) emerges not just as an essential provider of watts but also as a vital spark igniting sustainable AI revolutions.

Bank of America (BAC) just gave the utility maverick a boost with an upgrade, following a major overhaul where Dominion streamlined its strategy. Dominion Energy divested non-essential assets, fortified its financial standing, reduced risks from its offshore wind project, and simplified its strategic approach.

Let's have a closer look.

About Dominion Energy Stock

Incorporated in 1983, Richmond-based Dominion Energy, Inc. (D) produces and distributes energy across the U.S. Operating through Dominion Energy Virginia, Dominion Energy South Carolina, and Contracted Energy segments, the company serves millions with regulated electricity, natural gas (NGM24), and renewable energy. Dominion's extensive infrastructure includes vast electric and gas distribution networks and significant generating capacity.

Valued at $44.5 billion by market cap, shares of Dominion have gained 13.4% on a YTD basis, outperforming the broader S&P 500 Index's ($SPX)11% returns over the same time frame. Moreover, the stock currently trades just 2.6% below the 52-week high of $54.74.

On May 7, Dominion Energy’s board of directors declared a dividend of $0.67 per share of common stock, payable to its shareholders on June 20. The company’s annualized dividend of $2.67 translates to a 5.05% dividend yield. 

In terms of valuation, Dominion stock trades at 19.28 times forward earnings and 3.09 times sales, lower than its peers, such as NextEra Energy, Inc. (NEE) and Southern Company (SO).

Dominion’s Q1 Earnings Beats Wall Street Projections

Shares of the utility company rose after it reported Q1 earnings results on May 2. Although Dominion’s operating revenue of $3.6 billion missed Wall Street's estimates by 9%, its adjusted EPS, which declined 6.8% annually to $0.55, beat projections by 7.8%. As of March 31, its cash and cash equivalents increased to $265 million from $184 million as of Dec. 31.

During the March shareholder meeting, Dominion CEO Robert M. Blue said, “Economic growth, electrification, accelerating data center expansion are driving the most significant demand growth in our company’s history and they show no signs of abating.” In Northern Virginia, the data center industry is booming, and the CEO recently revealed requests for “several gigawatts” from data center developers.

As the Northern Virginia hub's thirst for electricity skyrockets, Dominion Energy has already connected 94 centers with over 4 gigawatts in 5 years, and there is more on the horizon – 15 new centers in 2024. It is ramping up infrastructure, with plans for new 500 kV lines and landing $2.5 billion in transmission projects. It is working with PJM, the SCC, and local officials to fast-track these vital projects.

Dominion Energy's management projects fiscal 2024 operating earnings to range between $2.62 and $2.87 per share, while in the next year, it is expected to be between $3.25 and $3.54 per share.

Analysts tracking Dominion Energy predict its EPS to grow to $2.75 in fiscal 2024, up 38.2% annually, and then another 22.6% to $3.37 in fiscal 2025.

What Do Analysts Expect for Dominion Energy Stock?

On May 10, BofA shifted its stance on Dominion, upgrading the stock from “Underperform” to “Neutral,” while also increasing its price target from $43 to $54, which implies a modest upside potential of 1.3%.

Analyst Paul Cole attributed Dominion's upgrade to its enhanced fundamentals and recent restructuring initiatives. Cole explains that the utility company has made its $9.8 billion offshore wind project less risky by taking some smart steps, such as building its own Jones Act compliant vessel and selling half of the project to Stonepeak. Plus, it has secured a big chunk of the budget and is collaborating with state officials to keep costs and expectations in check for the project's output and capacity.

Dominion Energy has a consensus “Moderate Buy” rating overall, compared to a "Hold" rating two months ago. Of the 14 analysts covering the stock, three advise a “Strong Buy,” and 11 give a “Hold.” 

While analysts are slowly getting more optimistic, the stock trades at a premium to its mean price target of $51.75, and the Street-high target price of $55 for Dominion suggests an upside potential of just 3.2%.