The AI Gold Rush: Why Utilities are the New Picks and Shovels
Like most people working in the electric utilities industry I had no idea how crucial power delivery would become for the next great technological revolution. Since ChatGPT took the world by storm in late 2022 there has been an unprecedented flood of attention, talent, and capital into the AI revolution. Sam Altman, the CEO of OpenAI, recently said there were three primary components for AI: #1 Algorithms, #2 Compute, and #3 Data. In 2024 it’s become apparent that there is a fourth component: electricity. This isn’t just a theory, the data show that wall-street has taken notice.
2 of the top 5 best-performing S&P 500 companies in 2024 were utility stocks
It’s no surprise that one of the best performing stocks in the S&P 500 for 2024 was Nvidia, coming in at number 3. What may be surprising is that the stock that stole the 2nd-place spot from Nvidia was a utility stock for a company called Vistra Energy based in Texas. Coming in after Nvidia in 4th place is GE Vernova, an energy equipment and services company recently spun out of GE.
2024 S&P 500 top-performing stocks
Palantir (PLTR): 340.5% gain
Vistra (VST): 257.9% gain
Nvidia (NVDA): 171.2% gain
GE Vernova (GEV): 150.6% gain
United Airlines (UAL): 135.3%
What is Vistra Energy?
Vistra Energy (VST) ended 2024 with a remarkable 257.9% surge in its share price. For comparison the broader S&P 500 gained 25.0%. Vistra is an integrated retailer and generator of power. Headquartered in Irving, Texas, Vistra operates in various capacities across 20 states.
Vistra’s retail services reach roughly 5 million customers under brands including TXU Energy, Dynegy, Homefield Energy, Ambit Energy, and Crius Energy. Vistra’s wholesale generation assets have a total capacity of approximately 41,000 MW, with about half coming from natural gas generation. For context: 41,000 MW is enough to power about 20 million homes.
Of particular interest to investors are Vistra’s nuclear generation and energy storage capabilities. Vistra recently completed it’s acquisition of Energy Harbor which added approximately 4,000 MW of nuclear generation power to bring Vistra’s new total to roughly 6,400 MW of nuclear capacity. As the US faces constraints on our ability to generate and deliver enough electricity to power new data centers there is a renewed focus on the virtues of nuclear energy. Vistra also has the second largest energy storage capacity in the country with about 1000MW of storage capacity. Grid reliability is increasingly important to customers and the ability to provide real-time demand-response through energy storage appears to be a significant advantage for Vistra.
About GE Vernova
GE Vernova (GEV) ended 2024 with a 150.6% gain since it was listed in April of 2024. The fact that it achieved those gains in only three quarters is all the more impressive. GE Vernova was spun-out of General Electric to form an independent company that includes what was previously GE Renewable Energy, GE Power, and GE Digital.
GE Vernova designs, manufactures, installs, and services equipment for utilities, power generation companies, and various industrial customers. It is a manufacturer of gas turbines, wind turbines, and other power generation equipment. In addition to manufacturing GEV also provides various services to support the design, installation, and service of these products. Furthermore GEV develops and implements software solutions for grid automation and grid management.
GE Vernova’s 2024 gains appear to be due to two contributing factors: shareholder clarity and stronger than expected demand owing to data centers. GE’s planned spinoff of it’s various business units has been long-planned and is unlocking latent value in the way shareholders were hoping. Additionally, and perhaps more importantly, GE Vernova is capitalizing on the demand for energy to power the AI boom. While nuclear power is increasingly attractive as a clean energy source, the extended timeline to bring new nuclear power online is increasing demand for gas generation in the near term.
Mark Zuckerberg’s Warning About the Electric Grid
In a recent podcast interview Mark Zuckerberg expressed concern that access to power will be the fundamental limiter in scaling AI. He said with regard to investing capital in GPU clusters: "you're seeing a bunch of companies thinking 'wow we should really just invest a lot of money in building out these things.' I think that will go for some period of time… But I actually think that, before we run into that, we're going to run into energy constraints.” He observed about the energy industry: "When you're talking about building large new power plants or large build-outs and building transmission lines that cross public or private land... you're talking about many years of lead time." The key indicator for the future of the utility space came when Zuckerberg said: “I think we would probably build out bigger clusters than we currently can if we could get the energy to do it”.
Picks and Shovels
When thinking about utilities and AI I’m reminded of the “picks-and-shovels” business model that is frequently referenced by venture capitalists. In California’s 19th century gold-rush there were occasionally prospectors who scored big and took home a one-time windfall. Those who built profitable and sustainable businesses were the ones selling the picks and shovels to the prospectors. A more recent example is Amazon’s overwhelming success with Amazon Web Services providing the digital infrastructure (picks and shovels) that powers over 30% of all internet traffic. As AI continues to scale it’s impossible to know for sure who the ultimate winners of the algorithm race will be, but we can be certain that the power infrastructure will play a critical role no matter the victors. There’s never been a better time to be a part of building our nation’s electric grid.
