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The global energy landscape is witnessing a transformative shift amid escalating electricity demands driven by artificial intelligence (AI) data centers. Leading investment bank Goldman Sachs (GS) predicts that AI is poised to catalyze a whopping 160% surge in data center power demand by 2030, with these centers consuming 8% of the total U.S. electricity output by 2030, compared to just 3% in 2022.
Furthermore, the International Energy Agency (IEA) forecasts global data center electricity consumption to soar beyond 1,000 TWh by 2026, much higher than the 460 TWh consumed by data centers in 2022.
With energy being the backbone of electricity generation, this surging electricity demand presents a highly beneficial opportunity for two energy stocks, Vistra Corp. (VST) and Targa Resources (TRGP). With an impressive track record of outperforming the broader market this year, these stocks are capturing investors' attention, and analysts anticipate even more potential upside ahead.
Let’s take a closer look.
Energy Stock #1: Vistra
With a market cap of around $33.4 billion, Texas-based Vistra Corp. (VST) is an integrated retail electricity and power generation firm. It also engages in wholesale energy transactions, commodity risk management, fuel production, and logistics. The company boasts a generation capacity of 37,000 megawatts, utilizing a diverse energy mix that includes natural gas (NGM24), nuclear, coal, solar, and battery storage facilities.
Shares of Vistra have rallied 168.9% on a YTD basis, significantly exceeding the broader S&P 500 Index’s ($SPX) 11.3% gain during the same time frame.
On May 2, the company declared a quarterly dividend of $0.2175 per share for Q2, payable to its shareholders on June 28. This represents a notable 7% annual increase. The company’s annualized dividend of $0.87 translates to a 0.85% dividend yield.
In terms of valuation, the stock is trading at 25.37 times forward earnings. That’s higher than some of its utility sector peers, but VST is also projected for above-average growth.
Despite falling short of bottom-line projections, Vistra's shares soared by nearly 9.1% following its Q1 earnings results on May 8. This positive market sentiment was fueled by its better-than-expected topline figure and its inclusion in the S&P 500 Index on the same day. Its operating revenue of $3.1 billion outshone forecasts by 4.5%. Also, during the quarter, its ongoing operations adjusted EBITDA of $813 million showed a solid 46.8% annual improvement.
Apart from dividend payments, the company is also committed to rewarding its shareholders through share repurchases. As of May 3, Vistra completed approximately $3.9 billion in share repurchases since November 2021, and anticipates allocating at least $2.3 billion for share repurchases between 2024 and 2025.
For fiscal 2024, management anticipates ongoing operations adjusted EBITDA to range between $4.6 billion and $5.1 billion. Looking forward to fiscal 2025, the company projects ongoing operations adjusted EBITDA to be between $5 billion and $5.5 billion.
Analysts tracking Vistra project the company’s profit to increase marginally year over year to $3.61 per share in fiscal 2024 and grow another 13% to $4.08 per share in fiscal 2025.
VST has a unanimous “Strong Buy” rating from all seven analysts covering the stock.
The average analyst price target of $110.43 indicates a modest potential upside of 7.7% from the current price levels. However, the Street-high price target of $133 suggests that the stock could rally nearly 30%.
Energy Stock #2: Targa Resources
Headquartered in Houston, Texas, Targa Resources Corp. (TRGP) is a leading provider of midstream services and one of the largest independent midstream infrastructure companies in North America. Valued at a market cap of $25.2 billion, its operations are essential for the efficient, safe, and reliable delivery of energy across the U.S. and to international markets. The company’s assets connect natural gas and natural gas liquids to meet the growing demand for cleaner fuels and feedstocks.
Shares of Targa Resources have surged nearly 31.9% on a YTD basis, outshining the broader SPX’s low double-digit return during the same period.
On May 15, Targa Resources paid its shareholders a quarterly dividend of $0.75 per share, representing an impressive 50% jump from the previous quarterly dividend. The company’s annualized dividend of $3.00 per share translates to a 2.62% dividend yield.
In terms of valuation, the stock is trading at 20.98 times forward earnings, much lower than its own five-year average of 49.64x.
On May 2, the company announced its Q1 earnings results. While EPS of $1.22 missed forecasts by 9.6%, its total revenue of $4.6 billion topped estimates by nearly 6.1%. Also, its adjusted EBITDA grew 2.7% annually to $966.2 million.
During the quarter, Targa repurchased approximately $124 million of its common shares. As of March 31, the company’s total consolidated liquidity amounted to approximately $2.6 billion.
In May, Targa announced a new 275 MMcf/d cryogenic gas processing plant in Permian Midland and a 150 MBbl/d fractionator in Mont Belvieu, set to operate by late 2025 and mid-2026, respectively, boosting production and infrastructure.
For the full year, management projects the company’s adjusted EBITDA to range between $3.7 billion and $3.9 billion.
Analysts tracking Targa Resources predict the company’s profit to reach $5.62 per share in fiscal 2024, up 53.6% year over year, and grow another 23.8% to $6.96 per share in fiscal 2025.
Targa Resources stock has a consensus “Strong Buy” rating overall. Out of the 18 analysts covering the stock, 16 suggest a “Strong Buy,” and the remaining two give a “Moderate Buy” rating.
The average analyst price target of $125.11 indicates a potential upside of 9.5% from the current price levels. However, the Street-high price target of $134 suggests a potential upside of around 17.3%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
