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At the beginning of the development of AI, chip stocks were popular due to the shortage of chips, causing a surge in the share prices of chip giants such as NVIDIA, AMD, MICRO Technology, and others.

Going into 2024, people are beginning to discover that AI development is not only lacking chips, but also power, as AI's data centers need to consume a lot of energy.

As a result, U.S. equity investors began to turn their sights to power stocks. In 2024, some power stocks outperformed even Endeavada, such as Vistra Energy, the leading US power supplier, rose more than 96% in the year.

Will power stocks be the next AI beneficiary?

This article will help you sort out the investment logic of power stocks, comb through the different types of power stocks, and talk about how to invest in power stocks.

Investment logic for power stocks

The logic of investing in power stocks is simple, in fact, the overwhelming demand for AI can lead to power shortages.

Rapid growth in AI demand is expected to result in rapid growth in AI demand as the power costs of generative AI fall, but this growth may be dictated by slow growth in power infrastructure.

Morgan Stanley's report, using the parable of a “rabbit race,” pointed out that while AI technology is developing rapidly, its growth depends on a stable supply of electricity, and the construction of power infrastructure often faces many challenges and delays.

Morgan Stanley predicts that global demand for generative AI power could double, especially before 2027.

The growth rate of data center power demand is expected to exceed that of global power demand, especially in terms of generative AI power demand, with a compound annual growth rate (CAGR) of around 105% from 2023 to 2027.

However, the growth of power infrastructure may not be able to keep up with the growth in demand for data centers. Morgan Stanley noted that issues such as grid connectivity availability, power line capacity, planning and permitting delays for new transmission and distribution projects, and supply chain bottlenecks could all be regulatory factors.

These issues may lead data center developers to be willing to pay higher premium electricity rates to ensure power supply.

Power shortages coupled with premium electricity prices could provide opportunities for power stocks.

What is power stock?

Power shares, commonly known as Power generation stocks, refer to the shares of companies engaged in power generation, transmission and distribution of electricity, etc. These companies produce and sell the electricity we use every day.

Such stocks are often classified as utility stocks because electricity is one of the essential basic energies in modern life.

In the stock market, electricity is the largest industry in the utilities sector. Of these, regulated electricity and renewable energy are the main subsectors, and they account for most of the market capitalization. Other diverse subdivisions such as utilities, gas and tap water are smaller.

Therefore, if you want to understand power stocks, you can do research from related subsectors in the utilities section.

What are the types of power shares? What are the main stocks?

Within the utilities segment of U.S. stocks, there are four main electricity-related subsectors: regulated electricians, independent generators, renewable energy suppliers, and diversified utilities.

Different types of power stocks may differ in their characteristics. Here is a brief overview of these types:

1. Regulated Electricians

• Definition: These companies that provide basic power services, such as power generation, transmission and electricity sales, are often heavily regulated.

• Company Characteristics: Generally stable income, but growth may be relatively limited.

• Total Market Capitalization: $9083 billion

• Representative Companies: New Era Energy (NEE), American Southern Corporation (SO), and Duke Energy (DUK)

REGULATED ELECTRICIANS ARE THE LARGEST SUBSECTOR BY MARKET CAPITALIZATION IN THE UTILITIES SEGMENT, WITH A TOTAL MARKET CAPITALIZATION OF $9083 BILLION. These companies often face strict regulations for providing basic electricity services, such as the area of service provision, pricing and quality of service, etc.

This regulation gives the industry a high barrier to entry, but at the same time limits the room for profit because companies cannot raise electricity prices at will. As a result, these companies' share prices tend to fluctuate slightly, have reliable dividends, but have limited growth.

Representative companies in this segment are New Age Energy (NEE), American Southern Corporation (SO), and Duke Energy (DUK).

Ranked by market capitalization, New Era Energy is the flagship company in this segment. Founded in Florida, USA in 1984, New Era Energy is one of the top ten electric power providers in the United States. The company has two business divisions: Florida Power & Light (FPL) and NextEra Energy Resources (NEER).

Among them, FPL is the largest power company in Florida, almost as much as utilities elsewhere in the United States. NEER is the company's renewable energy project, with wind and solar centers in 26 U.S. states and Canada, which not only provides funding and operations for the company's utility projects, but also sells electricity to retail customers, making it a major source of growth for the company's business.

2. Independent Power Producers (IPPs)

• Definition: These companies operate independently and are not constrained by traditional utilities.

• Company characteristics: Generally, profitability is relatively high, but stock price volatility is also relatively high.

• Market Cap: $466

• Representative companies: Vistra Energy (VST), NRG Energy (NRG)

Independent Power Companies (IPP) are companies that generate power and sell electricity to utilities or other entities.

The main area between IPP and regulated electric utilities is that IPP operates in competitive markets and has greater pricing and operational flexibility.

In other words, independent generators can sell electricity directly to retail customers. Independent generators may have more room to adjust prices when power is not in demand. As a result, the share price of such companies may be more sensitive to fluctuations in electricity prices.

There are not many companies in this block, only a few, of which the largest by market capitalization are two US companies: Vistra Energy and NRG Energy.

Against the backdrop of growing demand for AI power, the two companies' share prices rose dramatically in 2024, and under the leadership of the two companies, the overall performance of the independent power generation industry will be markedly better than regulated power companies.

3. renewables

• Definition: These companies focus on using renewable resources (such as nuclear, wind, solar) to generate electricity.

• Company Characteristics: High growth potential, supported by government subsidies and environmental policies, but may face challenges in terms of technology and storage.

• Block Total Market Capitalization: US$1738 million

• Representative company: Constellation Energy (CEG)

Companies in the renewable energy sector rely primarily on renewable resources such as biomass, geothermal, solar, hydro and wind energy for power generation and distribution.

The representative company of this block is Constellation Energy.

Constellation Energy is a large provider of carbon-free energy generation. Until 2022, it has been a subsidiary of Exelon Corporation. After delisting from its parent company in February 2022, it successfully positioned itself as the largest carbon-free nuclear power plant operator in the United States.

As a power producer and supplier with a capacity of more than 32,400 megawatts, Constellation Energy supplies power to more than 2 million homes and businesses. Constellation Energy, as a nuclear power company, is gaining more attention as a U.S. emphasis on clean energy.

The company's share price has risen 65% since 2024. According to the company's February 27, 2024 earnings are expected to show strong growth, with earnings per share (EPS) expected to be in the range of $7.23 to $8.03.

4. Diversified Public Sector

• Definition: These companies not only provide electricity, but may also involve other utility sectors such as gas, water, etc.

• Company Characteristics: A stable source of income, but growth may be slower.

• Block Market Capitalization: $1055 million

• Representative companies: Sampra Energy (SRE), AES Power Generation (AES)

Companies in the diversified utility segment focus not only on power supply, but also provide other types of utility services, such as natural gas and water.

Sampra Energy (SRE) and AES Power Generation (AES) are the representative companies of the block. However, since 2024, the stock prices of the two companies have been relatively flat and even outperformed the market.

While these companies offer a variety of utility services, in the current market environment, they may face some challenges that cause their share prices to perform less than others focused on electricity or renewable energy.

How to invest in power shares?

Investing in the power industry can adopt a variety of strategies, both by selecting a specific power company to invest in, or capturing the performance of the entire industry by investing in ETFs in the utility segment.

1. Utility ETF: By investing in ETFs in the utilities segment, you can track the performance of the entire utility industry, rather than relying on a single company. According to data from the ETF Database, the largest publicly traded ETF is the XLU. It tracks the movement of the US utilities sector. XLU is characterized by low price volatility, stable dividends, but limited growth. As of this year, XLU's gain is only 3.19%, underperforming the S&P 500 and Nasdaq.

2. Research and Analysis: Thorough research and analysis is essential before making investment decisions. This includes understanding the financial situation, growth prospects, market position, and industry trends of each company and ETF.

3. Risk Management: The power industry has a certain specificity and challenge, so it is necessary to develop an effective risk management strategy. This can include diversifying investments, setting stop loss points, reviewing portfolios regularly, and so on.

Risks of investing in power stocks

1. Policy Risks: The impact of government policy on the power industry cannot be ignored. The government may implement new policies on competition, prices, environmental standards, etc., in the electricity market, changes in these policies could have an impact on investment in power stocks.

2. Market Risk: The competitiveness of the electricity market often affects the performance of power stocks. Power shares may fall if market competition intensifies.

3. International market price risk: Due to the globalization of the electricity market, changes in international market prices may have an impact on investments in power stocks.

4th. Weather risk: The power capacity and demand of power stocks are often linked to the weather. For example, a dry drought can cause a drop in hydroelectric plant power generation, and bad weather can lead to a significant drop in electricity demand. These factors can have an impact on the share price of power stocks.

5. Risk of technological change: As technology continues to advance, new power generation technologies may impact traditional ways of generating power. Failure of a power company to keep up with the pace of technological development in a timely manner can lead to a decline in its market position, affecting its share price performance.

In summary, investing in power stocks requires a careful study of the dynamics and policy changes in the electricity market, while also paying attention to the company's own operating and technical development in order to better assess investment risks.

Risk Disclosure: This content does not constitute research reports and is for reference only and does not serve as a basis for any investment decisions. The information referred to in this article is not a comprehensive description of the securities, markets or developments described. Although the source of information is considered reliable, the accuracy or completeness of the above is not guaranteed. In addition, the accuracy of any statements, opinions or predictions made in this article is not guaranteed.

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