These AI Stocks Are Just as Hot as Nvidia: A Closer Look
Vistra Energy, a prominent player in the utilities sector, has recently outperformed the market, particularly in 2024, where its stock has surged by more than 245%, making it the top performer in the S&P 500. This remarkable rise comes as investors flock to the utility sector, linking it to the booming artificial intelligence (AI) market, which has largely benefitted companies like Nvidia. However, this increasing interest could lead to complacency among investors who may need to prepare for a potential downturn.
The Nvidia Connection
While Nvidia has gained immense popularity and saw its shares skyrocket nearly 150% this year, largely due to the increasing demand for its chips, Vistra’s impressive growth is also tied to the AI revolution. The demand for power to fuel AI services is soaring, and Vistra, a leader in nuclear energy generation, positions itself as an essential provider in this landscape. Additionally, Constellation Energy, another utility stock, has gained over 135% this year, ranking as the third-best performer in the S&P 500.
Utility Sector on the Rise
The entire utility sector appears to be on an upward trajectory, with the Utilities Select Sector SPDR exchange-traded fund (ETF) climbing nearly 30% — significantly outpacing the S&P 500 and Nasdaq Composite, which reported gains of 20%. Constellation Energy and Vistra represent the fourth and ninth largest holdings in this utilities ETF, respectively, illustrating their significant influence in the sector.
A Warning Signs for Utilities
Despite the euphoric surge, analysts are cautioning investors about potential risks. Dean Christians, a senior research analyst at SentimenTrader, recently stated that the utility sector has reached a critical crossroads. He suggested that many indicators point towards the group being overextended to the upside. Currently, the utilities ETF trades at approximately 19 times next year’s earnings estimates, slightly above its five-year average forward price-to-earnings (P/E) ratio.
Moreover, Constellation Energy appears particularly overvalued, with a P/E ratio exceeding 30 times the expected 2025 earnings — marking a multi-year high for the stock. Christians mentioned that the surge in utilities could be influenced by multiple factors, including Federal Reserve policy shifts, a slowing job market, or anticipated energy demands driven by AI. Despite the current optimism, he warned that utilities might be poised for a downside reversal, especially considering the unfavorable outlook after similar excessive surges in the past.
Wall Street Predictions
Wall Street analysts also anticipate a cooling off period for this overly heated sector. Research from FactSet indicates that the median price targets for individual stocks in the utilities ETF show an average increase of just 3.2% over the next 12 months, marking the smallest expected rise among the S&P 500’s eleven sectors. In comparison, energy stocks are projected to experience a more than 20% increase, suggesting stronger growth potential outside the utilities category.
Looking Ahead
Amidst the frenzy, some traditional utility stocks, such as Duke Energy, Dominion, and Consolidated Edison, maintain healthy dividend yields and relatively lower valuations. These stocks trade at forward P/E ratios in the mid-to-high teens, showcasing a more reasonable investment profile for cautious investors. James Ragan, a director of wealth management research at D.A. Davidson, emphasized that investors should remain vigilant and continue to explore opportunities in the utility sector, despite the significant run-up in stock prices.
Interestingly, the general perception of utility stocks has undergone a remarkable transformation. There remains a degree of skepticism among individual investors, as evidenced by a recent survey from eToro. According to Bret Kenwell, a U.S. investment analyst, utility stocks are still under-owned when compared to other sectors like financial services, tech, and energy, underscoring how these once “boring and unloved” stocks are suddenly gaining attention.
Conclusion
For investors eyeing the utility sector driven by the AI revolution, it’s essential to tread carefully. While stocks like Vistra and Constellation Energy have delivered stunning performance this year, the current valuations may indicate that much of the future potential has already been priced in. As always, due diligence and timing are critical in navigating this newly exciting but potentially over-inflated market landscape. Even if AI continues to drive energy demand, the simple lesson here is that not every stock associated with the tech boom will automatically yield substantial returns.
