In the wave of technology driven by generative artificial intelligence (AI), power companies have unexpectedly become the darling of the capital market.
On this year's S&P 500 component stock price increase list, traditional power companies such as Vistra have performed outstandingly, leading the way with doubled stock prices. At the same time, hedge funds that were originally focused on high-tech fields have also increased their layout in the power industry.
The counterattack of these power companies is due to their provision of the rarest resource in the AI supply chain, which is the high-intensity electricity required for data center operations. The rapid popularization of generative AI has led to a surge in electricity demand, not only boosting the valuations of related companies, but also redefining the strategic position of the power industry.
AI driven
In the past few years, power companies have been neglected due to slow demand growth and high debt. Several energy companies, including Vistra's predecessor, were once in trouble due to bankruptcy. However, the rise of generative AI is reshaping the rules of the game.
According to Goldman Sachs' research, the power consumption of a ChatGPT query is 6 to 10 times that of a Google search. The high demand for electricity in AI projects has led power companies to return to the perspective of the capital market.
Technology giants such as Amazon and Microsoft have signed bargaining agreements with power companies to ensure power supply for their AI data centers. Vistra and other companies have become the biggest beneficiaries of the AI boom due to their flexible business layout and sufficient dispatchable power. Efficient energy supplies such as natural gas and nuclear power plants have brought competitive advantages to these enterprises.
At the same time, the trend of electric vehicle popularization and manufacturing return has further driven up the demand for electricity in the United States. Regions such as Texas and the Mid Atlantic region, where electricity markets are liberalized, provide opportunities for companies like Vistra to sell electricity at market prices, enabling them to quickly seize the dividends of demand growth.
Cross border layout of hedge funds
Philippe Laffont, founder of Coatue Management, predicted the emergence of humanoid AI robots several years ago. As of the end of September this year, Coatue's stake in Vistra and Constellation is worth up to $2.3 billion, making it one of the main winners in this wave of electricity stock boom.
Lone Pine Capital has also achieved significant returns through investments from power companies such as Vistra. Its net return rate as of the end of September this year reached 22%, with one-fifth of the earnings coming from power stocks.
What is even more remarkable is the performance of Third Point Fund. As one of the funds betting on the disruptive potential of AI, its best performing holdings are Vistra. As of the end of November, Third Point's flagship fund recorded a 27% annual return, close to the S&P 500 index's 28% total return for the same period, far exceeding the overall hedge fund index's increase of about 10%.
In addition, macro hedge funds such as Discovery Capital Management and Castle Hook Partners have also achieved significant success in this field. Among them, the main fund of Discovery Capital Management has risen by 47% as of November this year, and Castle Hook Partners has doubled its returns by holding shares in GE Vernova, with the main fund increasing by over 60%.
Although the AI driven electricity stock boom has attracted a large influx of capital, the attitudes of market participants are not consistent. Some established energy funds choose to gradually exit when valuations are high. For example, Electron Capital Partners cleared its Vistra stock in the third quarter, but its flagship fund still recorded a 23% return for the year.
Analysts say that the reason for this differentiation is that not all power companies can benefit from the AI boom. Only companies located in market-oriented electricity pricing regions with reliable power generation capabilities can truly seize this opportunity. Especially natural gas and nuclear power plants with rapid response capabilities have shown significant advantages in market demand fluctuations. And those companies that lack flexibility and rely mainly on renewable energy may find it difficult to share this dividend.
In addition, analysts warn that the AI boom may also lead to overheating risks in the electricity market. As capital continues to pour in, industry valuations may gradually deviate from fundamentals, bringing uncertainty to future growth.
Nicholas Colas, co-founder of DataTrek Research, told First Financial reporters that the strategy of investors indirectly participating in the AI field through the utility sector may no longer be effective. "The utility sector is a reasonable place for capital investment and can achieve good long-term total returns, but technology stocks are still a better way to directly profit from AI.