In the age of artificial intelligence, big tech companies have an insatiable appetite for energy, which has sent shares of Constellation Energy (CEG) soaring.
Shares of Constellation, the largest U.S. operator of nuclear power plants, are up more than 85% this year and slightly off an all-time high hit in May. The Baltimore-based company's shares are outperforming every other holding in the S&P 500 Utilities Select Sector ETF (XLU).
Wall Street's hope is that Constellation will inevitably strike “colocation” deals with one or more major tech companies to build the data centers they need to run their AI operations right next to Constellation's nuclear plants, giving them access to carbon-free electricity.
Constellation CEO Joe Dominguez said at a recent media roundtable that the company is “in pretty extensive discussions with a number of companies that are interested in this.”
Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT) and Meta (META) are expected to spend a combined $200 billion this year on cloud and AI investments, including building and maintaining data centers.
Meanwhile, electricity demand in U.S. data centers is expected to more than double by 2030 due to the use of AI, according to a study by consulting firm McKinsey & Company.
Other independent power companies expected to benefit from increased data center energy demand include Vistra Corp (VST) and NRG Energy (NRG), which are up about 120% and 55%, respectively, year to date.
But Wall Street analysts say Constellation stands out because it owns the largest fleet of nuclear power plants in the U.S., with 21 reactors generating electricity across the country — a move that could be more advantageous for big tech companies trying to hit carbon emissions targets.
Analyst ratings for the stock include 9 “buy,” 5 “hold,” and 0 “sell” ratings.
“Only a nuclear power plant operator really has the capacity to serve data centers that run on carbon-free generation 24 hours a day, seven days a week, 365 days a year,” James Salacker, utilities, power and renewable energy analyst at BMO, told Yahoo Finance.
In one sign of demand, Amazon earlier this year purchased a $650 million data center campus in Berwick, Pennsylvania, adjacent to a nuclear power plant owned and operated by Talen Energy. The deal was a first for Amazon. The 1,200-acre data center will be powered by the adjacent nuclear plant.
Analysts say Constellation's factories in Illinois and Pennsylvania could be ideal locations for a large technology company.
The company also has another advantage, analysts say: Unlike typical utility companies, Constellation is unregulated, meaning the energy rates it sets don't require regulatory approval.
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Constellation Energy operates the nation's largest collection of nuclear power plants, including the Calvert Cliffs Nuclear Generating Station on the Chesapeake Bay in Lusby, Md. (Kim Hairston/The Baltimore Sun/Tribune News Service via Getty Images) (The Baltimore Sun via Getty Images)
“Constellation is really more of an energy business,” Neil Culton, senior equity analyst at Wells Fargo, told Yahoo Finance in a recent interview.
“The income they receive is determined, to some extent, by the price of market forces.”
The company also benefits from the Biden administration's Inflation Control Act, which aims to incentivize the transition to green energy. Culton noted that Constellation generates electricity at about $25 per megawatt-hour, while the IRA allows it to sell at an uncapped price of about $45 per megawatt-hour.
“There's a lot of interest from data center developers to sign long-term contracts at premium prices,” the analyst said. “Conceptually there's no limit to the profits they can make.”
But if electricity prices rise sharply, Constellation and other companies in the industry could come under scrutiny from Washington.
“Ideally, a slow and steady increase in electricity prices (with some fluctuations around that vector) is the best outcome for customers, generators and shareholders, while sharp or sudden movements could attract unwanted political attention,” BMO's Thalacker wrote in a recent note.
Constellation separated from utility giant Exelon (EXC) and has been operating as an independent energy provider since 2022. The company, which also focuses on renewable energy and hydroelectric power, is buying back its own shares and recently increased its dividend.
In 2023, Constellation signed a deal with Microsoft to reduce emissions at one of the software giant's datacenters through carbon-free energy matching, a process in which clean energy is identified locally and calculated every hour of every day.
In recent years, the company has signed deals with PepsiCo, McCormick and Best Buy to run their operations on renewable energy from solar projects in Texas.
In its most recent quarterly earnings report, Constellation projected 10% annual earnings per share growth over the next decade.
“That 10 percent could be much higher” if electricity prices rise or if Wall Street's hopes of a big tech acquisition come true, Culton said.
Ines Ferre is a senior business reporter at Yahoo Finance. Follow her on X. Follow.
