We recently analyzed 8 best utilities stocks to buy to profit from the AI boom according to hedge funds. Since Constellation Energy Corp (NASDAQ:CEG) was part of the list, the stock deserves a deeper look. But first, let’s see why everyone’s taking about AI catalysts for utilities stocks these days.
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.
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).
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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.”
Constellation Energy Corp (NASDAQ:CEG) ranks 4th in Insider Monkey’s list of the 8 Best Utilities Stocks to Ride the AI Boom in 2024.
If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.