Utility Stocks Surge on AI and Cloud Computing Boom

Who are you calling boring?

Shares in power companies have outpaced the broader S&P 500 over the past three months, with utility stocks accounting for three of the five best performers in the index.

Positive Charge

Similar to consumer-focused firms like Procter & Gamble or Coca-Cola, the stocks of utility companies are generally seen as safe and defensive bets. They don’t typically come with tech-like breakout potential, but they’re consistent and tend to weather the ups and downs of the market without the extremes. And unless Americans start leaving the grid to live off the land with wood fires for heat and shadow puppets as their only form of entertainment, energy is something people will always need.

In an era when seemingly every tech company is vying to win the AI race, power is the name of the game. Just like crypto mines, AI data centers require tons of energy for computing and cooling power. Wells Fargo recently reported that US electricity demand is expected to grow by as much as 20% by 2030, and AI data centers alone are likely to add 323 terawatt hours of electricity demand (one terawatt powers 70,000 homes for a year):

• Constellation and NRG are the fourth and fifth top-performing stocks on the S&P 500 this year, with their stock up 84% and 58%, respectively. But Irving, Texas-based Vistra Corp is even more impressive, at No. 2 with a stock rise of 138%.
• Reaves Asset Management President John Bartlett told the Wall Street Journal that “the puck is going” toward energy stocks, but the key to demand trends is watching the plans of Big Tech names like Alphabet, Amazon, and Microsoft. For instance, Amazon said last month it plans to invest $11 billion into a new data center in Indiana. 

Negative Charge: The expansion isn’t without potential problems. The demand boost from future data centers would likely require burning more fossil fuels, something many consumers, businesses, and lawmakers want to avoid. Plus, if utility companies build out new infrastructure and power demand falls short, ratepayers could be stuck with higher bills for decades, the WSJ reported. Those wood fires and shadow puppets may not be such a bad option.