Constellation Energy (CEG) Is Profiting From the AI Data-Center Boom

Utility companies have become a huge opportunity in the artificial-intelligence ("AI") boom...

You see, investors used to look at utility companies as "defensive" investments. The industry is highly regulated, and it grows slowly. But it's critical to our lives, providing the power and electricity we need.

That means it offers steady cash flows that folks can rely on. So investors turn to utilities during recessions and times of uncertainty. But lately, the sector has been red-hot. And it has AI to thank...

Put simply, AI data centers need a lot of power to operate. And someone needs to provide that power. So increased AI investment will translate into higher demand for power supply from utilities.

It's no surprise, then, that the utility sector – as measured by the Utilities Select Sector SPDR Fund (XLU) – jumped nearly 20% in 2024, marking the sector's best annual gain since 2014.

Some companies – like the one we're diving into today – did even better.

This week, another utility company is on the move. I'm talking about Constellation Energy (CEG). Let's take a look at what news drove shares higher...

Why Did CEG's Stock Price Spike Last Week?

On Tuesday, Constellation and social media giant Meta Platforms (META) announced a 20-year partnership for 1.1 gigawatts ("GW") of nuclear power. For context, that's enough energy to power about 750,000 homes.

The agreement with Meta will keep Constellation's Clinton Clean Energy Center in Illinois open and operating. The power plant was originally set to close in 2027... And with the plant's future secured, Constellation is now looking to boost its production even more through small modular reactors at the site.

The agreement will send power to the grid, rather than directly to Meta. But that doesn't mean Meta isn't benefiting...

In 2020, Meta broke ground on its data center in DeKalb, Illinois. The social media giant has invested more than $1 billion in that facility.

The news of the partnership sent Constellation Energy's stock briefly soaring on Tuesday. CEG shares jumped more than 8% when markets opened, before giving up those gains over the rest of the day. Still, Constellation stock is up nearly 50% over the past year, and it's close to making a new all-time high.

And CEG's stock has more than tripled since ChatGPT's launch in November 2022.

Big Tech's Nuclear Power Deals

Meta isn't alone. Several other Big Tech companies have invested heavily in nuclear-energy sources to power their AI data centers. Here are a few of the biggest deals of 2024...

• Amazon (AMZN) paid $650 million for a nuclear-powered data center from Talen Energy (TLN).

• Microsoft (MSFT) locked in 20 years of power from Constellation Energy's (CEG) Three Mile Island nuclear plant.

• Alphabet (GOOGL) will pay to develop and construct several reactors to provide 500 megawatts of power.

That's just a small, early sample size. And these companies are racing each other to get their piece of the pie. I'm willing to bet we'll see many more deals and partnerships as tech giants continue to pour hundreds of billions of dollars into AI.

Why AI Needs So Much Power

This trend comes down to a crucial, yet simple fact: AI needs data centers to run its programs... And those data centers need tons of energy.

Right now, data centers account for anywhere between 1% and 3% of global energy usage. But as data centers support the growing needs of AI, they're going to use even more. After all, a single ChatGPT query uses up 10 times the energy of a regular Google search. And that's just one piece of the AI puzzle.

Because of this, AI could triple data centers' power usage in the U.S. by the end of the decade, according to the U.S. Department of Energy.

California utility PG&E (PCG) is already seeing this power demand show up. In an interview with Reuters, PG&E executive Mike Medeiros said that the utility company has seen a 40% jump in requests from companies looking to power their data centers.

So where is all this extra energy going to come from? Nuclear power is the clear choice...

Nuclear energy is incredibly efficient. One uranium pellet the size of your fingernail can produce the same amount of energy as 149 gallons of oil.

It's incredibly reliable, too. Nuclear plants have the least amount of downtime of any power source. That aligns nuclear energy perfectly with AI's around-the-clock energy demands.

How the White House Is Helping Nuclear

The government knows the AI boom needs more energy... And it knows nuclear power is the solution. That's true on both sides of the aisle – making nuclear power a "purple" issue.

After the November election, then-President Joe Biden unveiled a 37-page "road map" to triple nuclear energy capacity in the U.S. by 2050.

That would put U.S. nuclear-power capacity at about 300 GW, enough to power nearly 150 million homes. The outline also plans for 35 GW of that new nuclear power to be operating in about 10 years.

Then, last month, President Donald Trump signed his own executive orders to boost the nuclear industry.

Our colleague Steven Longenecker laid out some of those plans recently:

One of the order's most striking directives was aimed at America's notoriously cautious Nuclear Regulatory Commission ("NRC").

Long viewed as the primary bottleneck slowing new nuclear projects, the NRC has clear marching orders: Speed things up.

So not only does this trend have the backing of the Big Tech companies spending hundreds of billions of dollars... It also has the government behind it. (Former Energy Secretary Rick Perry even gave a presentation on this at last year's Stansberry Conference.)

Should You Buy Constellation Energy Stock?

Constellation owns a variety of facilities – nuclear, wind, and natural gas – which generate and sell electricity. These facilities are capital intensive. They cost a lot to build... but once they get going, they gush cash.

Almost two-thirds of Constellation's assets are in the "PJM" grid, which runs in 13 states, including Pennsylvania, New Jersey, and Maryland. The rest are scattered across grids from Texas to the upper Midwest, and all along the Atlantic Seaboard.

But what stands out is that nearly 90% of Constellation's generation comes from nuclear power. It's virtually a pure play on nuclear-energy generation... and a giant in its space, accounting for a quarter of the nuclear power plants in the U.S.

Now, looking at its numbers, Constellation generated nearly $24 billion in revenue in 2024. Of that $24 billion, $4.4 billion trickled down to operating income, and about $3.7 billion trickled down to net income.

And in terms of cash flows, it generated more than $4 billion in free cash flow ("FCF"). That's money it can use to pay out dividends, buy back stock, or reinvest in the business.

Because of those strong numbers, Constellation stock gets a B rating for financials in our proprietary Stansberry Score.

But because utilities are such a capital-intensive business (think about the cost of building and maintaining power plants), Constellation gets a D rating for capital efficiency.

And after soaring more than 500% over the past five years, the stock isn't cheap. Its price-to-earnings (P/E) ratio of 32 has earned Constellation a C grade for valuation. After all, Constellation's P/E ratio is well above XLU's P/E of 20... So it's pricey compared with the broad sector.

All in all, Constellation is not a screaming buy right now. But there's no question that it's going to be a leader in the years to come. It's set to be a top provider of nuclear power for AI data centers.

So put this stock at the top of your watch list – and consider buying on any pullbacks.

Other Nuclear Energy Stocks to Buy

My colleague and Stansberry's Investment Advisory editor Whitney Tilson recently did an interview discussing the nuclear sector. And he gave away seven nuclear stocks to keep on your watch list.

Those picks include a pure play on uranium, a backdoor way to play nuclear through a traditional oil company, and a recent IPO with huge potential in small modular reactors.

Not only does Whitney like the outlook for nuclear energy as a whole, but he's specifically bullish on nuclear fusion.

In short, nuclear fusion is an emerging technology that will provide far more energy than traditional nuclear power... And that makes it a huge investment opportunity as power demand for AI takes off in the coming years. Don't miss this trend as the AI-energy story evolves.

Good investing,

Nick Koziol