RBC Picks 2 Utility Stocks Powering the Data Center Revolution

Utility companies have long delivered reliable power, a service we’ve come to depend on without question. However, growing demand is putting new pressure on the grid and highlighting the need for expansion. The source of the new demand is hardly a secret – AI technology is booming, and it requires large-scale data centers to support its software and applications. And those data centers are notorious power consumers.

This situation has made it profitable for utility companies to start expanding their generation capacity, as well as to look into new power technologies. Nuclear power, alternative power sources, renewable energy – all are getting more attention as the data center expansion continues. The result is a surge of opportunity for investors in utility stocks.

RBC’s Shelby Tucker, a 5-star analyst rated in the top 2% of the Street’s stock pros, highlights this dynamic in a recent report: “We expect load growth estimates to be revised upwards, following the trends established throughout 2024. Demand, driven by the growth in AI data centers, has combined with the surge in reshoring of manufacturing to drive commercial and industrial load growth to levels not seen since the early 2000s… Ultimately, we expect utilities whose service territories experience heightened interest from large-load customers to continue to update IRPs and increase load forecasts, leading to the potential need for more incremental resources.”

Against this backdrop, Tucker has zeroed in on two utility stocks uniquely positioned to benefit from this trend, thanks to their strategic investments in data center infrastructure. We ran them through the TipRanks database to see what other Street experts make of his choices.

AES Corporation (AES)

The first utility stock we’ll look at is AES, a power company with an extensive portfolio of generating capacity and other assets, as well as a global footprint. From its base in Arlington, Virginia, across the Potomac from Washington, AES manages a network that spans the Americas and extends into Europe and Asia. The company’s focus is on the development and deployment of green power generation technology and capacity, on carbon-free electricity, and on creating the smart grid tech and digital solutions that will meet the ongoing needs of the electric utility sector as a business. What all of this means is that AES has a solid base, commensurate with its $9.5 billion market cap and $12-billion-plus in annual revenues.

AES’s recent activity footprint includes power plants in Brazil and Argentina, electric generation facilities in both the Netherlands and the UK, coal-fired power plants in India, and utility-scale electric generation capacity in the US. The company prides itself on its ability to match the facilities to the local needs – and that brings us to the data center connection. In the third quarter of this year, AES added 900 megawatts of new power load growth to its AES Ohio operations, to provide supply to meet increasing data center demand.

Data centers aren’t the only source of demand for power, and AES has plenty of new programs on its plate. Along with the expanded ops in Ohio, the company also completed 2.2 gigawatts of new power supply contracts in Q3, including 1.3 gigawatts of renewable energy in long-term power provision agreements. Also in Q3, AES reported having a substantial list of new projects in the pipeline to bring into operation before the end of this year. The company is also streamlining its operations by conducting asset sales, with proceeds up to $3.5 billion targeted through 2027.

All of this activity produced almost $3.3 billion in revenue for AES during 3Q24, the last period reported. That revenue total was down 4% year-over-year and missed the forecast by $170 million – but the company’s earnings in the quarter beat the estimates. The non-GAAP EPS came to 71 cents per share, 7 cents better than had been expected.

For RBC’s Tucker, the main attractive points for this stock are the company’s leading position in its niche as well as its solid pipeline of projects. He writes, “We view AES as a leader in the renewable IPP development space, primarily from their existing pipeline and relationships with large data center customers. As one of the largest corporate PPA developers, we expect the company’s 66 GW pipeline and 12.7 GW backlog to be largely servicing data center customers who are building the new wave of projects. The company has also made it clear that while input costs have increased in recent months, the growing competition for sourcing power has led to PPA prices outpacing input costs, driving margin expansion.”

Putting his stance into quantifiable terms, Tucker rates AES as Outperform (Buy), with a price target of $17 to suggest a one-year upside potential of 28%. (To watch Tucker’s track record, click here)

The 11 recent reviews here include 9 to Buy and 1 to Hold and Sell, each, for a Moderate Buy consensus rating. AES stock is priced at $13.29 and its $20.56 average target price implies that the shares will gain 55% in the coming months.. (See AES stock forecast)

Brookfield Renewable Partners (BEP)

Now we’ll turn to Brookfield Renewable Partners, the renewable energy company that operates as a public entity under the aegis of the larger Brookfield Asset Management. Brookfield Renewable Partners holds a portfolio based on, as the company’s name indicates, renewable energy, with a focus on distributed and sustainable energy projects. The company’s portfolio is made up of a wide range of green energy generation assets, including wind, solar, and hydroelectric power facilities. These assets operate at utility scale, and are spread across both North and South America, as well as Europe and Asia. Brookfield Renewable Partners boasts that its operating capacity exceeds 35,000 megawatts, and that it has another 200,000 megawatts in the development pipeline.

This company is always moving to proactively expand and enhance its asset portfolio. A quick look at highlights from the recent 3Q24 report will bear this out. During the third quarter of this year, BEP commissioned approximately 1,200 megawatts of new renewable energy capacity, and the company expects to reach a record level of 7,000 megawatts in new power capacity for the year as a whole. The company advanced its commercial initiatives, and secured contracts to deliver ‘an incremental 6,100-gigawatt hours per year of generation.’ To back this activity, the company could count on $4.6 billion in liquidity at the end of Q3. The company credits its success to fast growing demand, particularly from the tech sector – and within that, to the rapid expansion of data center and AI development.

Looking at the financial results, we find that BEP posted revenues of $1.47 billion in Q3, a total that was up almost 25% year-over-year and came in $40 million better than had been forecast. The company missed the estimates at the bottom line, however; the quarterly funds from operations (FFO) of 42 cents per share was a penny less than expectations.

That bottom-line miss didn’t bother RBC, and Shelby Tucker notes both BEP’s scale and its expansion: “Over the last five years, BEP more than doubled its clean energy contracted to corporate customers to over 20 TWh/year (representing about ~30% of its total contracted volumes), and management expects it to double to 44 TWh/year in 2028. Big tech represents a minority of what is currently contracted, but management expects big tech to represent the majority of volume growth to corporate customers going forward. In the last year, the company contracted to supply 35 TWh (delivered over a number of years) to big tech, representing about 78% of contracts to corporate customers and 70% of new contracts to all off-takers.”

These comments back up an Outperform (Buy) rating on BEP, while the price target of $31 points toward a one-year gain of 26% for the stock.

These shares have earned a Strong Buy consensus rating, based on 9 reviews that include 7 Buys and 2 Holds. The stock is currently trading for $24.54, and its $31.11 average target price closely matches the RBC outlook. (See BEP stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.