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While Nvidia (NVDA) has been getting all the attention this year (its market cap recently surpassed $3 trillion), the AI halo effect is revitalizing an unlikely industry.
Utilities are commonly known as one of the more boring sectors of the market. In a regulated industry where rate structures are determined by the state, power companies are not known for big growth. Because demand for electricity remains relatively constant through economic cycles, power companies are viewed as defensive.
Enter AI and the almost insatiable demand for power that comes with data centers.
“There's an AI rush happening here and it's the utilities that are selling shovels into this gold rush,” Sophie Karp, an equity analyst at KeyBanc, told Yahoo Finance.
The S&P 500 Utilities Index is up more than 10% this year, third behind communications services and information technology. Texas power company Vistra (VST) has more than doubled, putting it behind only Nvidia (NVDA) itself and Super Micro Computer (SMCI) on the S&P 500 year-to-date leaderboard. In fourth place is Constellation Energy (CEG), up nearly 70%.
Despite these gains, Karp said utility valuations remain historically attractive as profits have remained steady.
But there's one potential sticking point in this story: power capacity.
Canaccord Genuity's George Gianarikas raised this issue in a recent note: “The question we're asking is: how quickly can we build out energy infrastructure to support AI to support the growth objectives of the data center companies that are building that infrastructure?”
If utilities can provide some kind of supply, that could be a big win, but if not, “we expect there will be a digestion period for AI-related hardware; something will have to be sacrificed,” Gianarikas wrote.
Karp dismissed the concerns, saying it was more a matter of timing than anything else. Some areas already have plenty of generating capacity, he said. Others will need more capital investment and time to produce more power.
Either way, another important catalyst for utilities may be on the way: falling interest rates. Power stocks tend to trade inversely correlated with yields, so a selloff in power stocks before or when the Federal Reserve (finally) starts cutting rates could be another big blow to this new and attractive sector.
Julie Hyman is Yahoo Finance Live, weekdays 9am-11am ETFollow us on Twitter Jules Cimentand read Her other stories.
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