Here’s the Best S&P 500 Stock of 2024 (Hint: It’s Not Nvidia)

Power utilities aren’t always seen as the most exciting way to invest, but investors may need to rethink that view as the top performers S&P 500 The index stock of the year is retail electricity and electric power generation utility Vistra (VST 3.12%)up 210% this year. That beats Nvidiahis (NASDAQ: NVDA) 155% increase. The two events are not unrelated. Here’s why and how Vistra shares have performed so well this year.

Data centers, electricity demand and clean energy

It’s no secret that the growing demand for artificial intelligence (AI) applications is the reason for the gradual change in data center demand expectations. This is what is fueling the increased demand for graphics processing units (GPUs) and high-performance computing chips. This is great news for tech companies like Nvidia and Taiwan Semiconductor Manufacturing.

While the latter are apparent beneficiaries, there are also data center equipment companies such as Vertiv Holdings. If you’re looking for a value play on the theme, then the HVAC sector, especially Johnson Controls, worth seeing.

However, I digress. The focus of this article is the need to power data centers and the increasing demand for electricity. In particular, it is in an environment where policymakers remain committed to the clean energy transition. There are companies and utilities like Vistra and Constellation Energy (CEG 0.09%) enter the game.

Vistra

Vistra is a retail electricity and power generation company. It had 4 million retail customers at the end of 2023, and the acquisition of Energy Harbor in March added another 1 million. The Harbor Energy deal also added 4,000 megawatts (MW) of nuclear generation to go along with the 36,702 MW Vistra ended 2023 with, with 2,400 MW from nuclear.

Image source: Getty Images.

As such, the deal made Vistra “the largest competitive power generator in the country” and became the second largest competitive nuclear generator in the US. Investors are falling in love with nuclear power as a clean, sustainable and zero-carbon option. . This is particularly relevant as coal-fired power plants are being shut down in line with the clean energy transition.

The transition to clean energy

While no one doubts that the transition will happen, it is also undeniable that the feeling about the pace of the transition has also changed. The long-term policy outlook remains favorable to renewable energy; natural gas will likely represent a significant part of energy production for decades.

This is also good news for Vistra, as about 24,000 MW of its current capacity of 41,000 MW comes from natural gas. As such, this year’s share price increase also reflects a more favorable view of natural gas and a vote of confidence in Vistra’s 6,400 MW nuclear capacity.

Enter Amazon and Microsoft

The three largest cloud service providers are Amazon web services, Microsoftof Azure and AlphabetGoogle Cloud and must ensure long-term power to support its data centers. As such, Microsoft and Amazon entered into long-term power purchase agreements (PPAs) with Vistra this year.

Image source: Getty Images.

However, it is the 20-year PPA that Microsoft recently signed with Constellation Energy that has excited the market. Microsoft is buying power for its data centers, and Constellation will restart the Three Mile Island nuclear power plant to fulfill the deal. That’s a positive for the market, and so is the price Microsoft is willing to pay for power.

According to Reuters, Microsoft is paying up to $115 per megawatt-hour (MWh) in the deal. This compares favorably with Vistra’s total realized price of 51.20 MWh in the second quarter of 2024.

A stock to buy

The best case for Vistra is based on the idea that there is significant upside potential for future market prices for nuclear power given the Microsoft/Constellation deal and growing demand driven by AI. Vistra’s acquisition of Energy Harbor strengthened this case. In addition, Vistra recently announced that it will buy the remaining 15% of its subsidiary Vistra Vision (which houses its nuclear, energy storage and zero-carbon solar generation businesses) for $3.085 billion.

Image source: Getty Images.

Vistra’s capabilities in natural gas, nuclear and renewables are positive assets for the clean energy transition. Given these factors, it’s no wonder the sector is hot. Adding in falling interest rates (utilities are often seen as interest rate sensitive due to their debt load) is a recipe for sudden price appreciation.