NextEra Energy Has Big Plans to Meet AI Power Demand – Is the Stock a Buy Today?
Utility stocks are usually considered a boring and "defensive" sector...
Put simply, utilities are always in demand. Folks will always need to power their homes. So during bear markets (like in 2008, 2018, and 2022), investors turn to utilities for their steady cash flows.
That predictability comes with low growth, though. And that makes utilities a forgotten sector during strong bull markets. That's not the case in the current bull run, though...
Utilities have been a huge beneficiary of the artificial-intelligence ("AI") boom. AI needs lots of power to run its models (more on that in a bit). And utilities are seeing incredible demand as a result.
Take NextEra Energy (NEE) as an example... The company just held its annual investor meeting on Monday and said that "we are in a golden age of power demand." And it has big plans to build more capacity to fuel companies' AI push.
Before we get into whether NextEra stock is a buy today, we need to cover the tailwinds boosting the entire utility sector...
AI Needs Power
As my colleague David Engle wrote in October, AI data centers "devour" power. Right now, data centers account for anywhere between 1% and 3% of global energy usage. But that's just the starting point. As David wrote...
According to Deloitte analysis, the power demand from AI data centers alone could increase more than 30 times in the U.S., going from 4 [gigawatts ("GW")] in 2024 to 123 GW by 2035. That's enough to electrify nearly every household on the East Coast, or 100 million homes.
NextEra is seeing the same thing. In its annual presentation, the company estimated that power demand will grow six times faster over the next 20 years than it did in the 20 years ending in 2025. Just take a look at this chart from its slide deck...
Just over the next five years, NextEra sees electricity demand growth growing more than 18%. For comparison, electricity demand only grew 10% total between 2005 and 2025. So NextEra sees growth in the next five years alone doubling the growth over the past 20.
And data centers are the tailwind for the jump in demand. Over the next seven years alone, NextEra estimates that demand from AI data centers will surge 43%. That's more than double the 17% growth from the residential segment.
Even as the AI boom hits some bumps over Big Tech's spending and OpenAI's cash burn, utilities are still in a strong position. But the demand is huge problem right now...
There's too much demand for the current energy grid. In its slide deck, NextEra showed that four major utility regions – MISO in the Midwest, PJM Interconnection in the northeast, ERCOT in Texas, and SPP In the middle of the country – are going to run at capacity deficits over the next decade.
That means the power they provide won't be able to meet demand. And that means higher prices to secure power...
PJM estimates that its customers will pay an extra $16 billion over the next two years just because of the increased data-center demand.
But more capacity is on the way...
Utilities Need to Invest in More Capacity
As part of its Investor Day event, NextEra CEO John Ketchum said that the company plans to build 15 GW of power capacity by 2035 to help meet the incredible demand from AI.
For comparison, the Energy Information Administration has said that – in 2024 – 1 GW of electricity could power 800,000 homes. So over the next 10 years, NextEra plans to add enough capacity to power 12 million homes.
And that's a "fairly conservative" outlook... Ketchum also said that NextEra could double that target to 30 GW over the same period.
NextEra isn't the only one...
But NextEra is clearly the leader when it comes to investing in capacity. Over the past four years, the company has added 33 GW of power infrastructure. That's more than the next 20 utilities combined, by NextEra's measure.
So there's more capacity on the way. But it will take time to get the connections hooked up to the power plants and data centers. That means continued strain on the grid, and possibly consumers' wallets, in the near term.
Is NextEra the Best Utility Stock to Buy Today?
NextEra Energy is one of the largest utility and electrical infrastructure companies in the U.S. It serves the Florida market and owns the largest electrical utility in the country – Florida Power & Light Company. Altogether, it serves more than 12 million customers across the state.
Looking at our proprietary Stansberry Score, which measures a stock's prospects as a long-term investment, NextEra gets an overall score of 44. That's good for an overall grade of "C."
Under the hood, NextEra gets a "B" grade for its financials, but a grade of "D" for its capital efficiency. That's not surprising...
With the planned expansion in power capacity, NextEra has a lot of capital expenditures coming. And while that will be good for the company in the long term, it isn't the capital-light business model our system typically looks for.
As for valuation, NextEra gets an "F" here. At its current price-to-earnings ratio of 25 times, NextEra is just about trading in line with the S&P 500's price-to-earnings (P/E) ratio of 27 times.
But it's higher than the 20 times P/E ratio of the broader utilities sector, as measured by the State Street Utilities Select Sector SPDR Fund (XLU).
So our Stansberry Score is telling us that there may be better investing opportunities out there in the utility sector.
Competitors like Talen Energy (TLN), Vistra (VST), and NRG Energy (NRG) all receive higher grades on our proprietary ranking system. Vistra receives the highest grade at 75 out of 100, including an "A" grade for valuation.
All of these companies are benefitting from the same AI tailwinds for the utilities sector. So they may be better stocks to keep on your watch list. (My colleague David Engle recently did a more in-depth look at all three of these companies).
Where Else to Look for AI Exposure
Utilities are one beneficiary of the AI infrastructure build-out. But they're not the only one...
My colleague and Stansberry's Investment Advisory editor Whitney Tilson just went live with a special presentation detailing his current favorite AI stocks. And maybe surprisingly, not a single one of the Magnificent Seven made the list – not even AI darling Nvidia (NVDA).
Whitney's brand-new scoring system just triggered a new buy signal in one stock. Click here to watch his presentation and get the name and ticker of his top AI pick.
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