The utility sector has seen a remarkable surge in growth, with the S&P Utility Index climbing 20% in 2024. Companies like Vistra and Constellation Energy have experienced significant increases, with Vistra rising 258% last year. This unexpected move has raised concerns among some analysts that utilities may be overvalued.
The catalyst for this growth was Microsoft’s commitment to buy power from a restarted Three Mile Island nuclear reactor at above-market rates. However, the recent release of DeepSeek’s R1 technology has raised questions about the efficiency of generative AI training and inference, which may reduce power needs.
Some analysts believe that this sell-off was an overreaction and that data center demand will continue in the intermediate term. Bank of America analysts noted that while there is a lower probability of mega growth in the long term, there is a higher downside risk to efficiency gains. The hyperscalers, including Alphabet, Microsoft, and Amazon, have not indicated plans to slow down their data center buildouts, which may lead to a longer stay for utility stocks.
The sector’s performance has been influenced by investors’ expectations of big growth and valuations in the tech sector, as well as shifting expectations. However, some analysts see utilities as a classic value sector with lower growth and price-to-earnings ratios, trading like growth.
Source: https://finance.yahoo.com/news/tourists-who-invaded-utilities-have-gotten-a-wild-ride-morning-brief-110016574.html