AI Sparks Life Into Left-for-Dead Energy Sector
Artificial intelligence (AI) is revolutionizing the energy sector, particularly shining a light on independent power producers (IPPs) that have long been overlooked in the stock market. While traditional human intelligence requires breaks for water, snacks, and sleep, AI-powered systems continuously consume electricity to perform their tasks effectively.
Currently, two AI hardware firms – Super Micro Computer Inc. and Nvidia Corp. – dominate the S&P 500 rankings. However, Constellation Energy Corp., a company operating aging nuclear power plants, is rapidly climbing the ranks as well. This resurgence in interest in IPPs like Constellation is driven by the forecasted tripling of power consumption in US data centers by the end of the decade.
Historically, IPPs faced challenging times with bankruptcies following the deregulation of the energy sector in the 1990s. The rise of cheap shale gas, stagnant electricity demand, and a regulatory backlash further dampened investor interest in the sector. However, the recent rally in IPP stocks, such as Vistra Energy Corp. gaining 78% this year, indicates a potential revival and renewed investor confidence.
Despite the positive momentum, IPPs still trade at relatively low valuations compared to other sectors. Vistra Energy, for example, trades at about 8 times forward Ebitda with a free cash flow yield of nearly 13%. This suggests that the current interest in IPPs may not yet have reached bubble territory, offering a cautious optimism for investors eyeing the sector.
The resurgence of IPPs in the stock market signals a broader shift in the US energy landscape, affecting nuclear power, the electricity grid, and ultimately, household electricity bills. As AI continues to play a vital role in optimizing energy production and consumption, IPPs may find themselves in a new era of growth and relevance in the evolving energy sector landscape.
