Power Up Your Portfolio: 3 Utility Stocks That Will Benefit from the AI Data Center Boom

To power numerous artificial intelligence (AI) applications and platforms globally, data centers will be critical. Data centers play a pivotal role in AI by offering the computational power and infrastructure necessary for handling vast datasets, essential for training and operating AI models. They enable the scalability, storage, and connectivity required to support AI workloads, allowing for real-time data processing in machine learning, deep learning, and AI-driven services.

And data centers require power. Lots of it.

This report by Goldman Sachs projects that demand for power in the U.S. will rise roughly 2.4% between 2022 and 2030, and data center power demand will grow 160% by 2030. Delving deeper into the power consumption trends of data centers, the report says that currently data centers worldwide consume 1-2% of overall power, but this percentage will likely rise to 3-4% by the end of the decade. Elsewhere, consulting firm McKinsey is predicting that the U.S. will require an investment of more than $500 billion to cater to data center power demand by 2030, and research from the Boston Consulting Group projects that domestic data center energy use will triple from 130 terawatt hours in 2022 to 390 terawatt hours by 2030.

Against this backdrop, “Magnificent 7” giants have been making nuclear investments, and investors are looking for ways to benefit from this megatrend. Here are three that rank among JPMorgan's top power-producing picks.

#1. Vistra

Founded in 2016, Vistra (VST) is a Texas-based energy company that plays a significant role in power generation, electricity sales, and energy solutions. Vistra is one of the largest power producers in the U.S., owning a diverse portfolio of natural gas (NGX24), nuclear, solar, and coal facilities. The company's market cap currently stands at $43.6 billion.

VST stock has been on a tear in 2024 so far, rallying an impressive 221.9%. Moreover, the stock also offers a dividend yield of 0.69%.

The results for the most recent quarter were a mixed bag for Vistra. While revenues moved up, earnings declined for the company in Q2. Revenues for the quarter came in at $3.8 billion, up20.6% from the prior year, while earnings slipped by 23.1% in the same period to $0.90. 

Net cash from operating activities was $1.5 billion in the quarter, bringing the cash balance at the end of the quarter to $1.6 billion, with manageable short-term debt levels of $1.9 billion.

Vistra's nuclear assets are a critical part of its energy portfolio, with ownership of major nuclear generation facilities such as Beaver Valley, Comanche Peak, Davis-Besse, and Perry, totaling around 6.4 gigawatts of capacity. Recently, on Sept. 18, Vistra made a significant move by agreeing to acquire the remaining stake in Vistra Vision LLC, a subsidiary housing its nuclear and solar energy storage assets, for $3.25 billion. This acquisition is expected to strengthen the company’s clean energy footprint.

Vistra's long-term strategy also includes a robust focus on gas generation, particularly in the Electric Reliability Council of Texas (ERCOT) market - which JPMorgan noted as a strategic edge for the company. VST plans to add up to 2,000 megawatts of new dispatchable gas generation, including 500 MW through expansions at existing facilities. Part of this strategy involves converting the Coleto Creek coal plant to a gas-fueled facility, which is projected to contribute around 600 MW of capacity following the plant’s coal retirement in 2027.

These initiatives position Vistra to capitalize on both its nuclear capabilities and its growth in renewable and gas generation, reinforcing its standing in the evolving energy landscape.

Analysts have deemed the stock a “Strong Buy” overall, with a mean target price of $151.50. This denotes an upside potential of about 22.1% from current levels. Out of 12 analysts covering the stock, 11 have a “Strong Buy” rating and 1 has a "Moderate Buy" rating.

#2. Talen Energy

Founded in 2015, Talen Energy (TLN) was formed by the combination of PPL Corporation's (PPL) competitive power generation business with Riverstone Holdings. It is a U.S.-based energy and power generation company primarily involved in providing competitive electricity. The company's operations span power generation and renewable energy, and it's valued at a market cap of $9.05 billion.

TLN stock has had a strong showing in 2024, zooming 183% higher on a YTD basis.

Q2 2024 turned out be much better than expected for Talen, as it reported a beat on both revenue and earnings. Revenues for the quarter were at $489 million, up 62.4% from the year-ago period. EPS jumped to $7.60, coming in way ahead of the consensus estimate for a loss of $1.14 per share. Earnings were impacted by a sizeable $561 million gain on the sale of assets.

Net cash from operating activities was $150 million, as the company closed the quarter with a cash balance of $632 million, well ahead of its short-term debt levels of just $9 million.

Notably, Talen Energy's commercial strategy and significant exposure to market electricity prices position the company to capitalize on high demand drivers, including extreme weather and AI data centers. Its contract with Amazon (AMZN) is a prime example of this. Talen supplies power to an Amazon Web Services (AWS) data center located on a property adjacent to its Susquehanna Nuclear Plant, allowing it to command a premium above wholesale electricity prices.

This partnership benefits both parties: Talen secures contracted payments at higher rates than the market, while AWS avoids tariffs and transmission costs by receiving power "behind the meter" from Susquehanna. 

AWS plans to significantly increase its data center capacity, with an ultimate target of 960 megawatts (MW) — roughly half of the total output of Susquehanna's nuclear units. The initial phases of the AWS data center expansion will consume 120 MW by 2025, growing to 240 MW by 2026, and are projected to add around $70 million in revenue for Talen due to the premium payments from AWS. This partnership essentially generates low-cost revenue for Talen.

In addition to its Susquehanna nuclear assets, Talen owns 8.4 gigawatts of primarily natural gas-powered plants in the mid-Atlantic region. The company sees additional opportunities to co-locate data centers next to its other power plants, further unlocking value. Talen's strategy of leveraging its existing assets while focusing on high-value partnerships and capital return to shareholders is expected to drive future growth.

Analysts have an average rating of “Strong Buy” for TLN stock, with a mean target price of $222.10 - which denotes an upside potential of 22.5% from current levels. Out of 10 analysts covering the stock, 8 have a “Strong Buy” rating and 2 have a “Moderate Buy” rating.

#3. Constellation Energy

We conclude our list with Constellation Energy (CEG). Spun off in 2022 from Exelon Corporation (EXC), Constellation Energy primarily focuses on power generation and competitive retail energy services. It is a leading provider of clean energy and competitive electricity services across the U.S., with core business areas spanning power generation, retail energy and clean energy.

Valued at a market cap of $83.37 billion, CEG stock is up 126% on a YTD basis. Notably, the stock also offers a dividend yield of 0.53%.

In the most recent quarter, Constellation reported revenues of $5.5 billion, almost unchanged from the previous year. EPS of $1.68 represented growth of 2.4% from the year-ago period. 

Constellation closed the quarter with a cash balance of $311 million, much lower than its short-term debt levels of about a billion dollars. Further, a negative net cash from operating activities balance of $1.3 billion for the first six months of 2024 is worth noting.

However, nuclear power generation increased to 45,314 GWh from 41,895 GWh in the previous year. Outage days also reduced to 52 from 119 in the year-ago period.

Further, Constellation boasts the largest fleet of nuclear plants domestically. Microsoft's (MSFT) 20 year fixed-price power purchase contract with Constellation for Unit 1 of the Three Mile Island nuclear plant has been a significant share price driver lately; Constellation estimates the contract as being worth $16 billion in Pennsylvania state GDP and $3.6 billion in state tax revenues.

Notably, owned generating capacity is 33,100 megawatts. Within this, Constellation’s nuclear-powered electricity generation capacity is 22,100 megawatts, or 67% of its total capacity. Further, Constellation is the top U.S. producer of carbon-free electricity, with a 10% share via its nuclear, wind, solar, and hydro units. All of its nuclear plants have a license to operate into the 2040s, and Constellation earned a reliability bonus for staying online during the winter storm in February 2023.

Analysts have an average rating of “Moderate Buy” for CEG stock, with a mean target price of $282.53, which denotes an upside potential of 6.8% from current levels. Out of 18 analysts covering the stock, 11 have a “Strong Buy” rating and 7 have a “Hold” rating.