The unquenchable energy demand from Big Tech in the AI era has sent Constellation Energy (NASDAQ:CEG) stock soaring. Shares of the largest nuclear plant operator in the US have climbed over 85% year to date, peaking at an all-time high in May. Constellation, based in Baltimore, has emerged as a top performer in the S&P 500 Utilities Select Sector ETF.
Wall Street is abuzz with expectations that Constellation will secure a “collocation” deal with major tech companies, allowing them to build data centers near Constellation’s nuclear plants for access to carbon-free power. “We are deeply engaged in discussions with several interested companies,” said CEO Joe Dominguez during a recent media roundtable.
Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and Meta (NASDAQ:META) are projected to spend a combined $200 billion this year on cloud and AI investments, including data center construction and maintenance.
According to McKinsey & Co., power demand from US data centers is expected to more than double by 2030 due to AI usage. Independent power providers like Vistra Corp (NYSE:VST) and NRG Energy (NYSE:NRG) are also expected to benefit, with their stocks up about 130% and 55% year to date, respectively. However, Constellation stands out with its extensive fleet of 21 nuclear reactors across the US, positioning it to better support Big Tech’s carbon emissions goals.
Constellation’s stock boasts nine Buy ratings, five Holds, and no Sells from analysts. “Nuclear plant operators are uniquely positioned to support data centers running continuously with carbon-free energy,” noted BMO analyst James Thalacker.
Earlier this year, Amazon purchased a $650 million data center campus in Berwick, PA, adjacent to a nuclear power plant operated by Talen Energy. This marked Amazon’s first such agreement, with the 1,200-acre data center powered by the neighboring nuclear facility.
Analysts see Constellation’s Illinois and Pennsylvania plants as ideal for similar Big Tech partnerships. Constellation also benefits from its unregulated status, allowing it to set energy rates without regulatory approval.
“Constellation is more of an energy play,” said Wells Fargo senior equity analyst Neil Kalton. “Their revenues are influenced by market power prices.”
The company also gains from the Biden Administration’s Inflation Reduction Act, which incentivizes the green energy transition. Kalton highlights that Constellation produces power at about $25 per megawatt-hour, while the IRA sets a selling floor price around $45 per megawatt-hour, with no cap on potential profits.
“There’s strong interest from data center developers in long-term contracts at premium prices,” Kalton added. However, analysts warn that rapid increases in power prices could draw political scrutiny.
Featured Image: Freepik
