At 200%, is Vistra stock still a buy?

With shares up 200% year to date, Vistra (VST 0.70%) recently passed Nvidia to become S&P 500 best performing stock in 2024. While this utility company is far from a traditional artificial intelligence (AI) stock, it could help meet the growing need for affordable clean energy as power-hungry AI technology is becoming mainstream. Let’s dig deeper to see if the recent hype is justified.

What is Vistra?

Vistra is an Irving, Texas-based utility company that made a big splash in early 2024 with the acquisition of Energy Harbour. This $3.43 billion deal gave the company four nuclear generating facilities and the second largest energy storage capacity in the United States at 1,020 megawatts (MW). The timely acquisition put Vistra in the right place at the right time to benefit from generative artificial intelligence hype cycle.

While tangible results have yet to materialize, many analysts believe AI will transform the world as we know it. Bloomberg research suggests the opportunity could grow at a compound annual rate of 42% to $1.3 trillion by 2023 as it finds use cases in industries from advertising to infrastructure development.

But even if the AI ​​industry achieves only a fraction of these lofty projections, one thing is for sure certain: It will need a lot of electricity.

Clean energy is needed

Large language patterns (LLM), like ChatGPT, is remarkably power-hungry, with an AI-powered search query using about 10 times more electricity than a Google search. The World Economic Forum estimates that the computing power needed to support this technology doubles every 100 days. This it’s the opposite the goals of many governments, which want to reduce carbon emissions and tackle climate change.

Vistra’s new nuclear portfolio could help solve both problems. Unlike traditional sources of electricity, such as coal or natural gas, nuclear power plants produce littleto-no greenhouse gases. They can also be more reliable than clean alternatives such as solar or wind because they can operate at any time of the day, regardless of weather conditions.

Capital is flowing into the industry, with tech giants investing directly in their future energy sources. This month, the software giant Microsoft signed a 20-year contract Constellation Energy to reopen Pennsylvania’s Three Mile Island nuclear power plant to help power Microsoft’s AI data centers. Although Vistra has yet to enter into such agreements, the growing acceptance of nuclear power could increase the profit potential and valuation of its plant.

How is business going?

Hype and future potential are great, but they mean very little if a company’s operational performance doesn’t match. The good news is that Vistra’s results are solid. Second quarter revenue up 21% year after year to $3.85 billion, while operating income rose 37% to $808 million. The company is also optimistic about its future.

Image source: Getty Images.

Over the next decade, management expects evolving environmental regulations to cause significant shutdowns of (relatively dirty) coal-fired power plants. These trends could lead to a supply shortage that Vistra intends to help fill. And its long-term strategy is not limited to nuclear power.

The The US Energy Information Administration estimates that natural gas emits nearly 50% less CO2 than coal, making it a important piece in solving the clean energy puzzle. And Vistra plans to expand its gas capacity to help meet growing demand — targeting 2,000 megawatts of new generation in the Texas market alone. The combination of Rising Demand related to artificial intelligence and environmental protection could help the company maintain its strong operational dynamics in the coming years.

Is the stock a buy?

It is usually not a good idea to buy stocks that have already risen 200% in a short period of time, as this type of action suggests that the hype may outweigh the fundamentals. That said, Vistra’s valuation still seems reasonable. With a the forward price-earnings ratio (P/E) ratio of 16, shares are cheaper than S&P 500 estimate of 23. And the stock looks like a great way to bet on America’s clean energy transition.