The AI revolution that started with the launch of ChatGPT has catapulted several sectors into the limelight that were hitherto believed to be unrelated to AI. Utilities is one of the most notable of these sectors. As more and more companies deploy AI in their systems and develop new applications, they need high-performance data centers to power their AI processing chips. And these data centers are power hogs. Why? Goldman Sachs in a recent report titled AI, data centers and the coming US power demand surge said that a single ChatGPT query takes about 6 to 10 times as much electricity to process as a typical Google search. Goldman Sachs also expects AI-led data center boom to cause a 160% increase in power demand in the U.S. Goldman analysts estimate that utility companies will invest $50 billion to support this new demand from the data center sector.
Goldman Sachs also expects data center power usage to more than double by 2030. It estimates that data centers would account for about 8% of the total power demand in the US, compared to just 3% in 2022. Goldman also expects power demand from AI to rise about 200 TWh in 2024-30, with the bull case estimate clocking in at 330 TWh, and the bear case estimate sitting at 110 TWh.
A latest Bloomberg report cited Manju Naglapur, senior vice president and general manager for cloud, applications and infrastructure solutions at Unisys Corp, who said that data centers were causing a spike in power demand even before the latest AI boom. Naglapur thinks with the current scale of investments in data centers, power consumption will increase “massively.”
As investors begin to look beyond obvious AI mega-cap tech names like Nvidia, Meta Platforms and Alphabet, which have already racked up solid gains so far, utilities stocks are trending in the AI investing space. Utilities Select Sector SPDR Fund (NYSEARCA:XLU) is up about 11% so far this year. Kevin Gordon, a Director and Senior Investment Strategist at Charles Schwab, recently said that 50% of the utilities sector constituents have seen their new 52-week highs. Utilities stocks come with an added allure thanks to their stable businesses and high dividend yields, something investors are looking for in the current economic environment where interest rates are expected to stay elevated.
A vast hydroelectric generation plant with a powerful waterfall cascading downwards.
Methodology
In this context, it’d be interesting to see which utilities stocks hedge funds are piling into to the ride this AI and data center boom. For this article we scanned Insider Monkey’s database of 919 hedge funds updated for the first quarter of 2024 and listed down all utilities stocks that are actively exposed to the AI power demand surge. From these stocks we chose 8 stocks with the highest number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? 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).
8. Dominion Energy Inc (NYSE:D)
Number of Hedge Fund Investors: 21
Virginia-based Dominion Energy Inc (NYSE:D) is one of the best AI utilities stocks to ride the AI boom. Dominion Energy Inc (NYSE:D) expects energy demand in Northern Virginia to more than double from 3.3 gigawatts in 2023 to 7 gigawatts in 2030, thanks to data centers.
Earlier this month, Dominion Energy Inc’s (NYSE:D) management talked about data center demand in Q1 earnings call:
The data center industry has grown substantially in Northern Virginia in recent years. In aggregate, we’ve connected 94 data centers with over 4 gigawatts of capacity over the last approximately 5 years. We expect to connect an additional 15 data centers in 2024.
Northern Virginia leads the world in data center markets. In recent years, this growth has accelerated in orders of magnitude, driven by one, number of data centers requesting to be connected to our system; 2, the size of each facility; and 3, the acceleration of each facility’s ramp schedule to reach full capacity. For some context, historically, a single data center typically had a demand of 30 megawatts or greater. However, we’re now receiving individual requests for demand of 60 to 90 megawatts or greater and it hasn’t stopped there. We get regular requests to support larger data center campuses that include multiple buildings and require total capacity ranging from 300 megawatts to as many as several gigawatts.
Read the full earnings call transcript here.
As of the end of the first quarter of 2024, 38 hedge funds tracked by Insider Monkey reported having stakes in Dominion Energy Inc (NYSE:D). The most notable stake in Dominion Energy Inc (NYSE:D) is owned by Ric Dillon’s Diamond Hill Capital which had a $283 million stake in Dominion Energy Inc (NYSE:D).
7. Exelon Corp (NASDAQ:EXC)
Number of Hedge Fund Investors: 28
Exelon Corp (NASDAQ:EXC) is one of the biggest electric utilities companies in the US, serving about 10 million customers. It’s one of the undervalued, high-yield dividend stocks in the utilities sector. Exelon Corp (NASDAQ:EXC) CEO Calvin Butler said during an interview last month that AI could cause a 900% jump in power demand in the Chicago area. Butler said that Exelon Corp (NASDAQ:EXC) was studying about 25 data center projects that would consume around 5 GW of power.
In February, Exelon Corp (NASDAQ:EXC) increased its dividend by 5.6%. Earlier this month, Exelon Corp (NASDAQ:EXC) posted Q1 results. Adjusted EPS in the quarter came in at $0.68, missing estimates by $0.02. Revenue in the quarter jumped 8.6% year over year to $6.04 billion, beating estimates by $420 million.
Insider Monkey’s database of 919 hedge funds shows that 28 hedge funds reported owning stakes in Exelon Corp (NASDAQ:EXC) as of the end of the first quarter of 2024. The biggest stake in Exelon Corp (NASDAQ:EXC) is owned by
6. Southern Co (NYSE:SO)
Number of Hedge Fund Investors: 29
Southern Co’s (NYSE:SO) electric utility arm in Georgia, Georgia Power expects retail electricity sales to jump 9% through 2028 with 80% of the demand coming from data centers. Southern Co’s (NYSE:SO) management talked about data center growth (which came in at 12% in Q1) and expectations during Q1 earnings call:
“All our businesses experienced a strong start for 2024, driving our results meaningfully higher than our estimate of $0.90 per share.
While there were several factors for this performance versus our estimate, one worth highlighting is the higher than expected weather-adjusted electricity sales in our commercial customer class. This was driven by a combination of our strong local economies as well as increased usage by many of our existing data center customers. Sales to data centers were up over 12% for the quarter compared to last year. Overall, weather-normal retail electric sales to all classes were 1.7% higher than the first quarter of 2023. Industrial sales are beginning to show signs of recovery following a soft 2023, with year-to-date increases led by the lumber and paper industries.”
Read the entire earnings call transcript here.
As of the end of the first quarter of 2024, 54 hedge funds tracked by Insider Monkey reported owning stakes in Southern Co (NYSE:SO). The biggest stakeholder of Southern Co (NYSE:SO) during this period was D. E. Shaw with a $132 million stake.
5. Duke Energy Corp (NYSE:DUK)
Number of Hedge Fund Investors: 34
North Carolina-based electric and natural gas utility company Duke Energy Corp (NYSE:DUK) is one of the best AI utilities stocks to buy in 2024 to benefit from the AI boom.
Duke Energy Corp (NYSE:DUK) management said during Q1 earnings call that AI-powered data center demand is “unprecedented.”
“These investments are part of our goal to have 30,000 megawatts of regulated renewables on our system by 2035. In the Carolinas, we filed certificates of Public Convenience and Necessity in March to build more than 2 gigawatts of new, advanced class of natural gas generation. The filings with the NCUC include two simple-cycle combustion turbines and one combined cycle plant, consistent with the Carolinas resource plan. Pending regulatory approvals, construction is planned to start in 2026 with all units operational by the end of 2028. Each of these new facilities will be cited in existing coal plants and will provide needed dispatchable generation when those units retire. We recognize there’s a lot of attention on natural gas in its role in achieving net zero.
We believe natural gas must be a part of not just Duke’s but our nation’s energy transition strategy in the face of unprecedented demand from AI data centers, chips manufacturers and other economic development, natural gas remains an essential tool to provide reliable and affordable energy for customers and complements our substantial investments in renewables and energy storage.”
Read the full earnings call transcript here.
Earlier this month Duke Energy Corp (NYSE:DUK) touched 52-week highs as Duke Energy Corp (NYSE:DUK) beat Q1 estimates amid rising residential and commercial customer demand in its service territory.
4. Constellation Energy Corp (NASDAQ:CEG)
Number of Hedge Fund Investors: 54
Earlier this month, UBS published a list of stocks it believes would benefit from the AI boom as it expects global AI revenues to cross $400 billion in the next three years. Constellation Energy Corp (NASDAQ:CEG) is among the stocks the firm is recommending investors to buy. Constellation Energy Corp (NASDAQ:CEG) recently posted Q1 results. Adjusted EPS in the quarter came in at $1.82, beating estimates by $0.53. Revenue in the quarter fell 18.6% year over year to $6.16 billion, missing estimates by $20 million.
Constellation Energy Corp’s (NASDAQ:CEG) management was careful while talking about AI-led data center growth in its latest earnings call, adding that it’s more interested in providing clean, nuclear energy to the interested companies. Constellation Energy Corp (NASDAQ:CEG) CEO Joseph Dominguez said during Q1 earnings call:
“I think the interest is like nothing else we’ve seen in 20 years in terms of the number of clients that are coming to us, the size and scale of the opportunity. So I would say that, you know, kind of the, you know, what you’re hearing in the market is certainly accurate in terms of the inbounds that we’re getting from an origination team perspective. And frankly, some of the outreach we’re doing. So that that all seems to be right. Right now it’s focused on nuclear because the clients we’re dealing with aren’t interested, as a general rule, in emitting technologies. They have sustainability goals. They have 24/7 clean goals, and they want to stay on that path. So we’re focused right now on the nuclear plant opportunity and monetizing the value of the attributes that we have.”
Read the full earnings call transcript here.
Sound Shore Management made the following comment about Constellation Energy Corporation (NASDAQ:CEG) in its Q3 2023 investor letter:
“On the plus side of the ledger, we had strong contributions from independent power producers Vistra and Constellation Energy Corporation (NASDAQ:CEG). Both stocks surged with higher US electricity prices as strong summer demand exposed reliability issues in many regions of the nation’s electric grid. Meanwhile, Midwest focused Constellation is the biggest producer of carbon-free electricity in the US with nuclear power plants representing the majority of its capacity. We added the name in January 2023 when the stock was trading at a below normal 15 times earnings. Our research identified an upside to earnings power from maturing hedges and regulatory changes, including the Inflation Reduction Act’s nuclear credit. A recent spinout from Exelon Corp, we viewed the strength of Constellation’s clean, reliable baseload power model as an appealing and high potential offering for residential and commercial customers. The company’s recent contract to supply Microsoft at premium power prices is evidence of the opportunity. Constellation is yet another example of an industry undergoing tremendous change that can offer attractive investment opportunities for investors with patience and a research process to uncover specific companies that are well positioned.”
3. NRG Energy Inc (NYSE:NRG)
Number of Hedge Fund Investors: 54
NRG Energy Inc (NYSE:NRG) is one of the biggest beneficiaries of the AI boom. NRG Energy Inc’s (NYSE:NRG) CEO Dr. Larry Coben talked about rising power demand and increasing activity in the industry because of AI during Q1 earnings call:
“For the first time in decades, and perhaps in my 40 years in this business, we are experiencing fundamental improvements driven by demand rather than commodity prices. We, along with every other forecasting expert I have read, are now expecting a step change in long-term power demand. This increase in demand is attributed to several factors, including electrification, manufacturing, onshoring, LNG, crypto, greater industrial loads and data center growth.
Recent advancements in GenAI are compounding and accelerating these factors, leading to the formation of the next power demand super cycle.”
Read the full earnings call transcript here.
During the first quarter, NRG Energy Inc’s (NYSE:NRG) GAAP EPS came in at $2.31. Revenue fell 3.8% year over year to $7.43 billion. NRG Energy Inc (NYSE:NRG) saw a huge increase in hedge fund sentiment in the first quarter, perhaps due to its AI-related growth prospects. A total of 44 hedge funds tracked by Insider Monkey reported owning stakes in NRG Energy Inc (NYSE:NRG) as of the end of the March quarter, up from 31 funds in the previous quarter.
2. NextEra Energy Inc (NYSE:NEE)
Number of Hedge Fund Investors: 72
UBS recently published a list of stocks it believes it’s bullish on in the AI infrastructure space. NextEra Energy Inc (NYSE:NEE) is part of the list. UBS believes revenue in the AI industry would cross $400 billion over the next three years. Earlier this year, NextEra Energy Inc (NYSE:NEE) CEO John Ketchum, while talking about power demand boost due to AI at CERAWeek by S&P Global conference, said:
“What you have today is electric demand that has been relatively flat for years now all of the sudden looking at an 81% increase.”
ClearBridge Value Equity Strategy stated the following regarding NextEra Energy, Inc. (NYSE:NEE) in its fourth quarter 2023 investor letter:
“We added a new position in NextEra Energy, Inc. (NYSE:NEE), in the utilities sector, which acquires, owns and manages contracted clean energy projects in the U.S. The company was at the center of the defensive stock storm when it slowed its renewable growth outlook modestly in late September, and the stock collapsed almost 30% in less than two weeks. We saw this as an opportunity to invest in arguably the best combination of a regulated utility and an experienced renewable operator with good long-term growth options. Even at a much-reduced estimated growth rate from higher financing costs, which will likely prove to be conservative, our estimate of intrinsic business value is materially higher.”
1. Vistra Corp. (NYSE:VST)
Number of Hedge Fund Investors: 79
Texas-based electricity company Vistra Corp. (NYSE:VST) is one of the best AI utilities stocks to buy now according to hedge fund investors. The stock has already gained about 168% this year through May 27. Vistra Corp. (NYSE:VST) earlier this month upped its dividend by 1.2% (second dividend increase this year), and also became part of the S&P 500, replacing Pioneer Natural Resources.
Earlier this month Morgan Stanley published a list of stocks poised to benefit from productivity opportunities because of AI. Vistra Corp. (NYSE:VST) was part of the list.
Vistra Corp. (NYSE:VST) CEO Jim Burke talked about data centers and clean energy opportunities while answering a question during Q1 earnings call:
“We started our process, actually, last year looking at the time, it was a perspective close of Energy Harbor, which of course is now in the rearview mirror, which is great. And of course, the Talon AWS deal came out early March. So that was certainly a benchmark and a watershed event for the industry. I will say the two unit sites still have, this is an order of preference that I think the market is grappling with. The two unit sites have more desirability for what their redundancy can provide. Then there’s the single unit sites, of course. And then there’s the gas plants. So what’s been very interesting, David, about our discussions with potential partners is we have normally sort of tried to search for opportunities for us to find partners and bid into their energy needs.
Now this has been reversed. We actually have partners, potential partners coming to us directly. And speed is really very important to them. I would say gas has become as interesting to many of them as nuclear has, in fact, even a preference for some. So from our standpoint, all options are on the table with 40,000 megawatts. And, you know, we’ve got obviously 12 states and 40,000 megawatts that we can do some of our projects with. But we’ve actually flipped it a little bit. So we’ve actually put out some RFPs ourselves. So instead of just responding to the inbounds, we’ve actually gone out to the marketplace to handle actually multiple conversations simultaneously and see what the best opportunity might be for us. And so that process is not concluded yet, but we’re in the middle of that process.”
Read the full earnings call transcript here.
Third Point Management stated the following regarding Vistra Corp. (NYSE:VST) in its first quarter 2024 investor letter:
“Vistra Corp. (NYSE:VST) is one of the largest independent power producers (“IPPs”) and retail electricity providers in the country. In 2023, Vistra’s natural gas, nuclear and coal plants generated over 20% of electricity consumed in Texas.
Unlike regulated utilities, where profits are determined by capital invested, Vistra operates in deregulated markets (primarily ERCOT and PJM), where they generate and sell electricity at market prices. Historically, Vistra has been valued at a steep discount to both the regulated utility sector and the broader market in part due to the challenging fundamentals of merchant power. Stagnant domestic electricity demand combined with an oversupply of natural gas has made US electricity prices among the lowest in the world. Meanwhile, significant growth in subsidized renewable generation has created major intraday price volatility in Vistra’s core markets, with power prices sometimes going negative during periods of abundant sunshine or wind. Bankruptcies, including Vistra’s former parent company TXU in 2014, have become commonplace in the sector over the last decade…” (Click here to read the full text)
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Disclosure: None. This article is originally published at Insider Monkey.
