Vistra's stock is up more than 200% this year. Could more gains could be ahead?

By Emily Bary

Stocks levered to nuclear power have done well recently on AI optimism. But an analyst notes that Vistra's efficient gas plants could also be 'a huge source of upside.'

The power trade keeps roaring, and that could help Vistra Corp.'s stock record its best monthly performance on record.

Vistra shares (VST) are already leading the S&P 500 SPX for the month, followed by fellow power stock Constellation Energy Corp. (CEG). Vistra's stock is up 39.4% in September, which would make for its biggest monthly gain on record if that carries through to the end of the month. The stock is currently on a 13-session win streak, its longest ever, according to Dow Jones Market Data.

The momentum for Vistra's stock, which has now tripled on the year to rank as the best S&P 500 performer of 2024, reflects a growing awareness from investors of the increased power requirements in an era of artificial intelligence and broad electrification. AI is multiple times more power-intensive than traditional technology applications, according to Jefferies analyst Antoine Aurimond.

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As the AI boom heats up, it's going up against a tight power grid, he explained, since energy companies spent years retiring plants for either economic or environmental reasons in the face of low power prices.

"The grid is going to be super tight in terms of supply/demand, and there's just not enough new capacity coming online because that takes time," Aurimond said.

His team at Jefferies has a buy rating and $137 target price on Vistra shares. They closed Wednesday near $119.

Vistra, like Constellation, operates nuclear plants, and investors have been excited about some high-profile nuclear-power deals involving major AI hyperscalers. Microsoft Corp. (MSFT), for instance, signed a 20-year power-purchase agreement with Constellation last week, which will see Constellation restart a Three Mile Island reactor.

Nuclear energy offers some advantages, in the eyes of many in the industry, because it's seen as cleaner than coal but also more reliable than some renewable sources that are weather-dependent, Aurimond said. But it's very costly and time-consuming to build new nuclear plants, he explained, which is why you likely won't see companies do that. At the same time, there's only one retired plant that's a good candidate for a restart - a smaller one owned by NextEra Energy Inc. (NEE) in Iowa.

For that reason, even though Vistra has a smaller nuclear fleet than Constellation, the company may actually be better positioned for the power trends again, according to Aurimond. Vistra is "one of the biggest holders of efficient gas plants across the country" and that could be "a huge source of upside," he said.

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Those gas plants, for the most part, currently are selling into the wholesale market in areas like Texas and the eastern U.S. That structure makes for more volatile earnings, but once companies are able to sign contracts with merchants, they could see more stable results.

Contracts with companies are a "game changer for the industry," Aurimond said, "and that's what's going to bridge the valuation discounts than most of these [independent power producers] have traditionally received."

While Constellation has the Microsoft nuclear agreement and Talen Energy Corp. (TLN) struck an an arrangement with Amazon.com Inc. (AMZN) earlier this year, Vistra has yet to sign such a contracted arrangement.

"People give them a lot of credit, because their fleet is just so good," and investors have come to expect that the company will soon have a deal of its own, Aurimond said. But the reaction to that news would depend on factors like the type of fuel used and the pricing, he explained. The Microsoft-Three Mile Island deal came with "extremely high" pricing, and he thinks future arrangements would likely come at lower prices for the power companies.

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-Emily Bary

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09-25-24 1732ET

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