According to a report by Goldman Sachs Research, the US electricity demand is set to surge in the coming years, driven in part by the growing need for power to support the increasing use of artificial intelligence (AI) and data centers. After a decade of roughly zero growth in power demand, the US is expected to experience a significant increase in electricity consumption, with demand rising by around 2.4% between 2022 and 2030.
The report estimates that around 0.9% of this growth will be driven by the increasing power needs of data centers, which are expected to use 8% of US power by 2030, up from 3% in 2022. This surge in demand will require significant investment in new generation capacity, with US utilities needing to spend around $50 billion to support data centers alone.
Furthermore, the report notes that the incremental power consumption of data centers will also drive an increase in natural gas demand, with an estimated 3.3 billion cubic feet per day of new demand expected by 2030. This will require new pipeline capacity to be built to meet the growing needs of the data center industry.
In contrast, the report highlights that Europe’s power demand has been declining over the past 15 years, largely due to a series of economic shocks, including the global financial crisis, the COVID-19 pandemic, and the energy crisis triggered by the war in Ukraine. Despite this, the report notes that Europe will still need to invest over $1 trillion to prepare its power grid for the increasing demands of AI and electrification.
Investors Are Plugging into the Utility Sector Amid the AI Boom
In an interview on Yahoo Finance, Pavel Molchanov, Managing Director at Raymond James, discussed the growing connection between the utility sector and the emerging trend of Artificial Intelligence (AI). Molchanov shed light on why utilities have become an unexpected beneficiary of the AI boom.
According to Molchanov, as the world becomes increasingly reliant on data centers to power AI technologies, the demand for electricity is expected to surge. This has led investors to take notice of the utility sector, which is poised to benefit from the growing need for power. Molchanov noted that while utilities are a regulated industry with fixed prices, the overall electricity demand is ultimately driven by the economy. Therefore, if data centers can create growth in overall US power demand for the first time in 20 years, it would be a positive development for utility companies.
Molchanov emphasized that utilities are still a defensive play but with a twist. The sector is expected to experience a modest growth rate of 2-3% per year, driven by the increasing demand for electricity. This growth is significant, considering that the US electricity demand has been stagnant since 2007.
The conversation also touched on the regional variability in the utility sector, with certain areas being more attractive for data centers due to lower electricity prices. Molchanov mentioned Virginia, Ohio, and Texas as regions that are well-positioned to benefit from the growth in data centers, while California is less attractive due to its high power prices.
The increasing use of AI and data centers will have a significant impact on the global energy landscape. The need for significant investment in new generation capacity and infrastructure to support this growth is clear. With that in context let’s take a look at the 10 high growth utility stocks to invest in.
A vibrant skyline illuminated by the lights of the electric utility company.
Our Methodology
To compile our list of the 10 high growth utility stocks to invest in, we used the Finviz and Yahoo stock screeners to find the 50 largest companies utility companies. We then narrowed our choices to 10 companies with the highest 5-year revenue growth. We also included their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The list is sorted in ascending order of their of their revenue growth.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 High Growth Utility Stocks To Invest In
10. Algonquin Power & Utilities (NYSE:AQN)
5-Year Revenue CAGR: 10.30%
No of Hedge Fund Investors: 11
Algonquin Power & Utilities (NYSE:AQN) is a utility company serving over 1.2 million customers across the United States, Canada, and Chile. The company has a portfolio of high-quality assets, including 13,517 miles of electric transmission lines, 8,482 miles of gas pipelines, and 6,941 miles of water mains.
On August 9, Algonquin Power & Utilities (NYSE:AQN) announced that it has entered into a definitive agreement to sell its renewable energy business, excluding hydro, to a wholly-owned subsidiary of LS Power for a total consideration of up to $2.5 billion. The sale is part of the company’s plan to transform into a pure-play regulated utility and optimize its regulated business activities, which is expected to create long-term value for its customers and shareholders.
Analysts believe that Algonquin Power & Utilities (NYSE:AQN) is on the right track, transforming into a traditional utility business with a focus on regulated assets and cost-cutting measures. The company’s new CEO is committed to reducing costs and improving profitability, with a focus on “capital-light growth” through better regulatory coverage and rate reviews. Industry analysts have reached a consensus on the stock’s Buy rating, with an average target price of $6 that suggests a 16.80% upside potential from its current levels.
9. Enel Chile (NYSE:ENIC)
5-Year Revenue CAGR: 11.73%
No of Hedge Fund Investors: 7
Enel Chile (NYSE:ENIC) is the largest electricity generation and distribution company in Chile. The company operates power plants and has a focus on renewable energy, particularly hydroelectric, solar, and wind energy. The company is part of the Enel Group, a global leader in energy.
Enel Chile’s (NYSE:ENIC) financials are impressive, with a solid balance sheet featuring $597 million in cash and equivalents, $2.5 billion in total current assets, and $12.5 billion in total assets. The company’s revenue and earnings have rebounded strongly from the economic slowdown of 2020 and 2021, with estimated revenue of $4.6 billion and earnings of $0.42 per share for 2024. This represents a significant increase from 2021 when the company reported revenue of $3.0 billion.
As one of the largest energy utilities in Chile, Enel Chile (NYSE:ENIC) is well-positioned to capitalize on the country’s growing demand for electricity. Enel Chile (NYSE:ENIC) has a diversified generation mix that includes hydroelectric, wind, solar, and fossil fuel sources, the company has successfully transitioned away from coal-fired plants and is committed to reducing its carbon footprint. Despite this Enel Chile (NYSE:ENIC) trades at a significant discount to its global peers, with a forward PE of 6.51, which represents a 62.81% discount compared to the sector median of 17.51. This undervaluation presents a unique opportunity for investors to buy into a high-quality company with a strong financial profile.
Despite some risks associated with the company’s exposure to the Chilean economy and currency fluctuations, Enel Chile’s (NYSE:ENIC) stable revenue and earnings profile, combined with its low valuation and high dividend yield, make it an attractive investment opportunity for long-term investors. The company is anticipated to experience 32.25% earnings growth this year. With a consensus Buy rating from industry analysts, the stock has a target price of $10.40, which represents a 41.71% upside potential from its current level.