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| By Jim Nelson |
The backdoor AI play that’s swept through Wall Street over the past year seems to have finally had its comeuppance.
As we’ve written many times here, the U.S. has a power problem.
While the AI buildout continues to drive the market higher, the need for electric power generation has never been greater.
After all, AI chips and the data centers that house them are power thirsty.
Here’s a chart Sean Brodrick shared a few weeks ago that shows what that new demand will look like going forward.
That’s why the utilities that produce that power have been flying for more than a year.
But with recent doubts about the longevity of the AI boom, this backdoor AI angle might be taking a break:
Over the past month, “utes” have tumbled. That was the only sector in the red during that period.
The companies that led this sell-off were the ones that rose the most on AI electric dreams:
Constellation Energy (CEG) and Vistra (VST) made headlines over the past year with deals to supply exclusive power to data centers over long time periods.
Today, they are starting to fall out of favor. But should they be?
The demand for new electricity doesn’t appear to be slipping.
We’ve also covered the capital spending the Mag 7 have planned for the next 12 months on building out AI infrastructure.
But there’s one more reason you might want to consider buying on this dip: Utes are income machines, especially when rates are cut.
Many compare utilities to bonds because of their large, predictable dividend payments.
But when fixed interest rates come down, it does two huge things for utilities.
- First, it makes their dividends all the more attractive compared to falling fixed rates on bonds.
- Second, it eases their high debt servicing costs to maintain and build out their networks.
For power generators like Constellation and Vistra, that means it will be cheaper to finance the work that needs to be done to expand power capacity.
That, in turn, means there’s more money at the end of the day to pay those dividends in the first place.
It’s a cycle that seems to be lining up for utilities right now.
With AI data centers still a booming business … and the Fed considering its first interest rate cut in a year … keep an eye on utility companies.
There are other trends that deserve just as much of your attention.
Here’s what your experts are recommending for you right now …
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Have a great weekend!
Jim Nelson
Managing Editor, Weiss Ratings Daily
