Home Markets Why Nvidia Stock Could Lag Behind A Key AI Energy Company

Why Nvidia Stock Could Lag Behind A Key AI Energy Company

by admin

Nvidia stock has soared 156% in 2024. Meanwhile, shares of Constellation Energy — a provider of nuclear power services and owner of the Three Mile Island facility in Pennsylvania that suffered an accident in March 1979 — have risen 129%.

Constellation — which recently signed a 10-year agreement for Microsoft to pay the nuclear energy leader about $16 billion, according to Seeking Alpha — could be a better investment than Nvidia. Here are three reasons:

  • Demand for energy to fuel data centers is speeding up as Nvidia’s revenue growth slows.
  • Constellation’s tepid growth is poised to increase as more hyperscalers follow Microsoft’s lead.
  • Analysts forecast more upside in Constellation’s stock.

One downside to consider is that analysts’ price targets fully capture Constellation’s upside, according to TipRanks.

AI Energy Demand To Surge As Nvidia’s Rapid Revenue Growth Slows

The demand for energy to operate data centers is forecast to rise as Nvidia revenue growth slows. U.S. power demand has remained roughly unchanged between 2014 and 2024, noted TheStreet. However overall power demand in data centers is projected to surge “160% by 2030,” according to a May 2024 Goldman Sachs report.

To be sure, demand for AI-related hardware and software is also forecast to grow rapidly. More specifically, Bain estimates the total addressable market will increase by 40% to 55% annually, ranging between $780 billion and $990 billion by 2027, according to Barron’s.

While Nvidia expects to grow faster than the industry, the AI chip designer’s revenue growth is slowing down. Nvidia’s revenues grew in a range of 206% to 265%, between the second quarter of 2023 and the first quarter of 2024, according to Investor’s Business Daily.

Nvidia is still growing rapidly — but at a lower rate. For instance, the AI chip designer’s revenue increased 122% in the second quarter of 2024 and the company forecasts 80% growth in the third quarter of 2024, I noted in a September post on Forbes.

Constellation’s Growth Should Speed Up

Constellation Energy operates the largest U.S. fleet of nuclear power plants, which is the preferred electricity generating fuel for tech companies, according to Seeking Alpha. In February 2022, Constellation was spun off from utility company, Exelon.

Constellation stock surged 22% on September 20 following the announcement of a 20-year deal with Microsoft to supply electricity from a $1.6 billion restart of the undamaged 835-megawatt nuclear Unit 1 of Three Mile Island — which “closed under economic pressure” in 2019, noted the Wall Street Journal.

The facility’s Unit 2 was shut down in 1979 after a partial core meltdown. The resulting five days of panic “heightened awareness of nuclear plants’ potential safety problems and contributed to a loss of enthusiasm for the industry that lasted decades,” the Journal reported.

The company’s latest financial report for the June 2024-ending quarter fell short of earnings and revenue expectations. However, Constellation Energy raised its earnings per share forecast for 2024.

Specifically, the company’s EPS of $1.68 was four cents below the consensus estimate while the company’s $5.48 billion in revenue fell $70 million short of analysts’ consensus forecast, noted TheStreet.

Constellation raised its adjusted EPS outlook for fiscal 2024 by 4.8% to $8 a share at the midpoint of the range — 19 cents more than the consensus, TheStreet reported.

Analysts Forecast More Upside For Constellation Stock

Might this boost in Constellation’s earnings growth target foreshadow expectations-beating revenue growth?

Analysts lifted the company’s stock price target significantly in the wake of the company’s deal with Microsoft. Examples include:

  • Wells Fargo raised Constellation Energy’s price target 20% to $300 — noting “strong interest from tech giants to secure clean power,” according to thefly.com.
  • Morgan Stanley boosted its CEG price target 24% to $313 — suggesting Microsoft’s “premium price” foreshadows future deals from cloud services providers at higher prices, noted TheStreet.
  • Jefferies increased its price target 40% to $256. TheStreet wrote that the deal between Constellation and Microsoft MSFT “has very positive sector ramifications, confirming the data-center thesis and broadening the range of opportunities for nukes,” noted Jefferies analyst Paul Zimbardo, according to MarketWatch.

Other analysts were bullish on Constellation. While Guggenheim’s Shahriar Pourreza added “the hyperscaler demand for clean megawatts is real,” Mizuho’s Maheep Mandloi indicated the arrangement “points to the need for 24×7 clean energy to meet data center needs,” MarketWatch noted.

To be sure, anti-nuclear sentiment — while negative at times is arguably less pronounced than in the past. With state and federal governments urging utilities to use nuclear and renewables fuel to make electricity, Constellation has more support than before.

Moreover, since it requires “neither expensive battery storage nor quick-on extra natural gas capacity equal to 110% of renewable capacity,” nuclear has advantages over renewables, reported TheStreet.

It appears Wall Street still sees more upside to Nvidia stock. The 42 analysts covering the AI chip designer set an average price target of $152 — representing 24% upside, according to TipRanks, which notes Constellation’s average price target of $214 from 20 analysts makes the stock about 1% overvalued.

You may also like

Leave a Comment