Utility stocks have been under pressure for the past few years as high interest rates depressed these capital intensive businesses. Yet the sector has rebounded over the past year as optimism over demand from data centers and artificial intelligence boost their prospects.

Coupled with the Federal Reserve entering a new rate-easing cycle after a debilitating era of “higher for longer”  monetary policy, it makes this the perfect time to invest in the utility sector. Moreover, because utilities tend to pay generous dividends — there is a reason they were once well-known as widows-and-orphans stocks — means shareholders will continue to be well-rewarded for their patience in waiting for the turnaround.

Electricity demand growth is accelerating. The International Energy Agency says global demand was sluggish last year, only growing 2.2%, but it expects that to change going forward. It forecasts a 54% increase in annual demand over the two years. In the U.S., demand will increase nationally by around 2%, but will depend on the region. 

In particular, those areas experiencing high data center growth such as the south Atlantic region will see demand increase as much as 5%, according to the U.S. Energy Information Administration. However, the agency is still digesting the impact data centers will have on consumption and will update its outlook when completed.

Stocks of two of the best utility operators have surged an average of 164% so far this year. But having come so far so fast, are they still a buy? Let’s dive in to find out.

24/7 Wall St. Insights:

• Utilities have begun their turnaround as an era of lower interest rates and rising energy demand combined to provide significant growth opportunities to the industry.
• The primary expansion targets are in data centers increasing electricity needs due to artificial intelligence’s insatiable demand for more.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

GE Vernova (GEV)

Spun off from the remnants of the old General Electric in April, GE Vernova (NYSE:GEV) has quickly climbed to be amongst the best performers in the industry. GEV stock has already more than doubled since its separation. It opened at $115 per share on its first day of trading and is up 110% today at $274 per share. 

GE Vernova focuses on gas, nuclear, hydro, and steam; wind; and electric grid solutions. It just posted a big earnings miss due to “incremental contract losses” from its offshore wind business that led to a 19% decline in orders for the third quarter. However, much of the rest of its operations turned in a strong performance allowing the utility to reaffirm its full-year forecast. It anticipates ​​grid equipment backlog will triple to around $18 billion by the end of 2024.

Wall Street remains upbeat with a buy recommendation on the stock and Deutsche Bank (NYSE:DB) just initiated coverage of GEV and set a one-year $354 per share price target. Analyst Nicole DeBlase says the industry pure play will benefit from sector investment that “is stronger than it has been in decades.” She believe the utility’s EBITDA will grow 63% annually through 2027.

GE Vernova doesn’t pay a dividend yet and investors shouldn’t expect much in the way of stock buybacks anytime soon. Yet as its business grows and its profit margins improve, look for both those to be a increasingly important part of building shareholder value.

Vistra (VST)

Vistra (NYSE:VST) is one of the largest electric utilities in Texas, but after acquiring Energy Harbor, a traditional electric utility and a nuclear power operator, earlier this year, it has expanded into 20 more states and is now the country’s second-largest nuclear power generation provider.

The acquisition has bolstered Vistra’s existing business and the market likes what it sees. VST stock has more than tripled in 2024 and has quadrupled over the past year. Shares now trade north of $127 per share. Analysts also have a bullish outlook on the stock and have set a consensus price target of $145 per share. BNP Paribas just started coverage and put a market high $231 per share price target on it, implying 84% upside in the stock.

Nuclear power is going to be an important component for data center electricity demand because of its lower cost and the desire for cleaner energy sources. With four nuclear power plants, Vistra — which doesn’t have a relationship yet with data centers — is arguably best poised to see the greatest growth.

There are significant expansion opportunities in small modular reactors (SMRs) that would benefit data centers. Hyperscaler Amazon (NASDAQ:AMZN) is looking to build SMRs in partnership with Dominion Energy (NYSE:D) while Alphabet‘s (NASDAQ:GOOG)(NASDAQ:GOOGL) Google partnered with privately held Kairos Power to build SMRs for its data center needs.

As a leading utility in the space, expect to see Vistra take full advantage of the opportunity and continue its upward growth trajectory.

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