AI needs more than just graphics-processing units: It needs power. A ChatGPT query can consume nearly 10 times more electricity than a Google search.
While U.S. power demand has remained relatively flat over the past decade, that trend is about to shift. According to a Goldman Sachs report in May, overall power demand in data centers is projected to surge by 160% by 2030.
Microsoft needs that massive amount of energy, fed not just by wind, solar and fossil fuels. It has agreed to purchase nuclear power from Constellation Energy (CEG) for 20 years, the first time Microsoft has secured a dedicated, 100% nuclear facility for its operations.
The deal was Constellation’s biggest ever. Constellation is now reopening its Unit 1 reactor at Three Mile Island, which closed due to a lack of economic competitiveness in 2019. It's expected to go back into service in 2028, according to a statement on Sept. 20.
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Nuclear power is considered clean because it generates electricity without producing carbon emissions, unlike fossil fuels like coal, oil and natural gas. Microsoft's shift indicates a growing interest in nuclear energy as a carbon-free option to support AI infrastructure.
“Policymakers and the market have received a huge wakeup call,” Constellation Chief Executive Joe Dominguez said in a Bloomberg interview. “There’s no version of the future of this country that doesn’t rely on these nuclear assets.”
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Robert Coward, a former president of the American Nuclear Society, said he “would expect additional similar agreements in the coming months and years,” according to The Washington Post.
Constellation stock surged more than 22% following the announcement on Sept. 20.
How big is Constellation’s potential?
Constellation Energy is a major U.S. energy company that supplies electricity, natural gas, and renewable energy. It operates nuclear-, wind- and solar-power plants.
The company’s latest financial report, in August, showed earnings per share of $1.68 for the quarter ended June 30, missing the consensus estimate of $1.72. Revenue of $5.48 billion fell short of analysts' consensus forecast of $5.55 billion.
Constellation raised its adjusted-EPS outlook for fiscal 2024 to between $7.60 and $8.40 a share, up from its previous guidance of $7.23 to $8.03. The consensus estimate stands at $7.81.
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Barclays in August initiated coverage of Constellation after the earnings report with an overweight rating and a $211 price target. It cited upside to consensus earnings estimates with a "bullish catalyst path ahead," thefly.com reported.
The restart plan, which would cost about $1.6 billion, faces strict regulatory challenges, including safety inspections from the Nuclear Regulatory Commission, which has never reopened a plant, The Washington Post reported.
But should it proceed successfully, the Three Mile Island site would supply Microsoft with enough energy to power 800,000 homes.
“This plant never should have been allowed to shut down. ... It will produce as much clean energy as all of the renewables [wind and solar] built in Pennsylvania over the last 30 years,” Dominguez said.
Microsoft’s capital expenditures are now dominated by investments in cloud infrastructure and AI. In the company’s July earnings call, it announced plans to further ramp up AI spending to meet surging demand.
Analyst lifts Constellation stock price target
At least five analysts upgraded their price targets on Constellation stock following the deal with Microsoft.
Wells Fargo raised Constellation Energy’s price target to $300 from $250 and affirmed an overweight rating.
The firm notes that the power purchase agreement with Microsoft indicates strong interest from tech giants to secure clean power. Wells Fargo sees it as a value-additive transaction but not without risk, according to thefly.com.
Morgan Stanley raised its CEG price target to $313 from $233 with an overweight rating.
The analyst said Microsoft paid "a premium price" in the deal, which shows the value of nuclear power for cloud service providers and suggests that future deals might come at higher prices.
Morgan Stanley is also offering positive outlooks for Vistra (VST) and PSE&G (PEG) , raising the stock price targets to $132 from $110 and to $95 from $83, respectively, both with overweight ratings.
Jefferies raised Constellation Energy's price target to $256 from $183 and maintained a hold rating.
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The power purchase agreement has "very positive sector ramifications," supporting the data center thesis and expanding opportunities for nuclear energy, according to the analyst.
Jefferies also advises investors to "keep in mind specific attributes that make the deal uniquely attractive."
Constellation Energy traded at $253.49 on Sept. 24.
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