Constellation Energy Stock Rises on Artificial Intelligence Demand From Big Tech

Big Tech AI

The surging demand for AI technology from major tech companies has driven up the value of Constellation Energy (NASDAQ:CEG) stock. The stock price of the largest nuclear plant operator in the United States has risen over 85% this year, hitting an all-time high in May. Constellation, headquartered in Baltimore, has become a top performer within the S&P 500 Utilities Select Sector ETF.

Wall Street anticipates that Constellation will secure a “collocation” agreement with large technology companies, allowing them to establish data centers close to Constellation’s nuclear power plants to access carbon-free energy. “We are actively engaged in discussions with several interested companies,” stated CEO Joe Dominguez during a recent media roundtable.

Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and Meta (NASDAQ:META) are projected to invest a combined $200 billion this year in cloud and AI initiatives, including data center construction and maintenance.

According to McKinsey & Co., the power demand from US data centers is expected to more than double by 2030 due to AI utilization. Independent power providers such as Vistra Corp (NYSE:VST) and NRG Energy (NYSE:NRG) are also anticipated to benefit, with their stock prices increasing about 130% and 55% this year, respectively. However, Constellation stands out due to its extensive fleet of 21 nuclear reactors across the United States, positioning it to better support Big Tech’s carbon emission reduction goals.

Constellation’s stock has earned nine Buy ratings, five Holds, and no Sells from analysts. “Nuclear plant operators are uniquely positioned to support data centers operating continuously with carbon-free energy,” noted BMO analyst James Thalacker.

Earlier this year, Amazon purchased a $650 million data center campus in Berwick, PA, adjacent to a nuclear power plant operated by Talen Energy. This marked Amazon’s first such agreement, with the 1,200-acre data center powered by the neighboring nuclear facility.

Analysts believe that Constellation’s Illinois and Pennsylvania plants are ideal locations for similar Big Tech partnerships. Constellation also benefits from its unregulated status, allowing it to set energy rates without regulatory approval.

“Constellation is more of an energy play,” said Wells Fargo senior equity analyst Neil Kalton. “Their revenues are influenced by market power prices.”

The company also gains from the Biden Administration’s Inflation Reduction Act, which incentivizes the green energy transition. Kalton highlights that Constellation produces power at about $25 per megawatt-hour, while the IRA sets a selling floor price around $45 per megawatt-hour, with no cap on potential profits.

“There’s strong interest from data center developers in long-term contracts at premium prices,” Kalton added. However, analysts caution that rapid increases in power prices could attract political scrutiny.