Constellation Energy (NASDAQ: CEG) is an energy stock that has benefited significantly from the artificial intelligence rally, with a total return of 57% so far in 2024. The fact that about 67% of the company's energy-producing capacity is from nuclear power plants has spearheaded its rise.
Nuclear power is one of the preferred types of energy sources for data centers, and the company has the nation's largest nuclear fleet. This has led to its shares vastly outperforming its sector this year; the Energy Select Sector SPDR Fund (NYSEARCA: XLE) has returned just 6%.
Constellation's Operations, Opportunities and Advantages
The company reported Q2 2024 financial results on August 6, 2024. The market reacted positively, with shares up over 6% after the release. First, let's detail the firm's operations and some of its strategic advantages. Then, we'll dig into those results and examine the stock's outlook.
Constellation Energy is the leading provider of carbon-free energy in the United States. In addition to nuclear power, 7% of its capacity is from renewables, including hydroelectric dams and wind or solar farms. Additionally, 26% comes from natural gas and oil plants. The company has some geographic diversity. 76% of its capacity is in the New York/Mid-Atlantic and Midwest regions of the U.S. It also has a significant presence in Texas.
A point of note for the firm is that as of year-end 2023, only 12.4% of its total capacity is under contract to supply large customers. The firm sells the power generated that is not under contract to the power grid. This leaves a large opportunity for the firm to grow its contractual relationships and bring in more revenue. This is because non-contracted supply often has price caps set by regulators.
However, contracted energy supply prices can rise higher. This lets companies boost revenue based on market conditions. With energy demand expected to grow 2.4% annually through 2030, increasing contracted supply allows firms to benefit more from rising prices.
To understand Constellation's rise, we must know why data center operators prefer nuclear power. Nuclear power offers the best of both worlds when it comes to power generation: reliability and sustainability. Data centers must run 24/7, and nuclear energy can generate power at any time, regardless of whether the sun is shining or the wind is blowing.
Additionally, nuclear energy has a low-carbon footprint compared to fossil fuels, which is an increasingly important metric for companies to minimize. This is especially important because data centers use so much energy. Data centers used 3% of all U.S. energy in 2022, and experts expect that number to rise to 8% by 2030.
Constellation Raises Guidance on Higher Energy Prices
Constellation’s adjusted earnings-per-share (EPS) came in at $1.68, slightly below analysts' expectations of $1.69. This was an increase of 2.4% from the previous year. Revenue also missed by $70 million, coming in at $5.48 billion, an increase of less than 1% from last year.
The big positive news and the reason shares jumped was the firm’s raised full-year adjusted EPS guidance. The company raised its midpoint guidance for the figure nearly 5%, up to $8. This midpoint was 3% higher than analysts had expected.
This guidance increase was largely due to news from PJM Interconnection, a grid operator. It said electricity prices in its latest auction rose by 800% from last year due to supply and demand imbalances.
The capacity factor of the company’s nuclear fleet, excluding two plants, increased by 3% to 95.4% from Q2 2023. The capacity factor shows the percentage of total energy capacity that plants are actually generating. This increase shows higher efficiency in the operation of these plants.
Constellation: Essential to Discovering AI's Potential
When it comes to fears related to the AI bubble, Constellation is a firm that has less to worry about. Giant tech companies are not slowing down their investments in AI despite market fears. There is great concern that utility companies are not keeping up with the power demand that AI will create in the future. Constellation will benefit from constrained supply.
Even if AI investments don’t pay off in world-changing ways, the energy needed to discover them still has to be supplied. With AI still in its infancy, companies like Constellation are likely to have a long leash on which to run.
