Even after a tough start to September, the market is once again trading at fresh all time highs.
And while it’s dipped a bit this summer, technology is the force driving this market higher.
The Magnificent Seven stocks were driven by technology, and arguably jump-started us out of the bear market in 2022.
And in the last five years, technology stocks have nearly doubled the return of the S&P 500.
The sector is being propelled by artificial intelligence (AI), which will continue to be a powerful catalyst for years to come.
AI promises to take technology to another level, and holds the potential to usher in self-driving cars, robots, smart cities and much more.
But this latest innovation is only made possible by existing technology. In fact, the development of AI is not possible without a very old technology that was all the rage about 130 years ago – electricity – and the right utility stocks are going to be major beneficiaries.
AI requires major energy-guzzling components to make it work. These components are housed in data centers. These places are specialized facilities used to house computer systems and related components. They have sophisticated temperature control systems, integrated fire suppression, redundant data communications connections, and backup power systems. Large data centers use as much electricity as a small town.
And all that was true even before AI.
AI systems require an estimated seven times as much electricity as traditional data center systems.
It is estimated that major tech companies will invest $1 trillion in data centers over the next five years. That’s a lot of juice. And it’s not just data centers.
Electric vehicles (EVs) will also require massive amounts of additional electric power for infrastructure and charging stations. Even if EVs grow to account for just 5% to 10% more of the current vehicle fleet, the additional power demand will be massive. In addition, new manufacturing including the planned semiconductor factories in this country will also suck huge resources from the grid.
The current level of electricity generation in this country cannot accommodate the massive onslaught of new technologies that lie ahead. Data centers are currently estimated to account for roughly 2.5% of U.S. electricity consumption. But that number is expected to soar to as high as 9% by 2030.
According to the U.S. Department of Energy, the current EVs on the road consume about 2.5% of all electricity in the U.S. And that number is growing rapidly. At the same time, investment in new manufacturing facilities will be three times the investment in new data centers in the near term, according to the Federal Energy Regulatory Commission.
After nearly two decades of stagnant growth, electricity demand is expected to soar in the years ahead. This year alone, electricity demand is growing 81% more than it did last year. Electricity demand is expected to grow at nearly twice the past rate for the rest of this decade.
New capacity will have to be added to the grid. But that takes time. Meanwhile, electricity prices are soaring and will likely continue to do so for a while. It makes previously stodgy electric utilities growth investments. Judging from recent expansions in production, most of the increasing demand is likely to be accommodated by sources that generate power from renewable sources.
Most of the increasing electricity demand (from data centers, EVs, and chip manufacturing) is coming from technology companies. And these techie types are climate-focused and usually have carbon mandates for the company, and they are looking to secure power sources for the long term, where these mandates really take effect. It is highly likely that these tech companies will try to secure carbon-friendly power sources whenever possible.
Companies that can provide low-carbon electricity generation should be the primary beneficiaries of this increasing electricity demand. But there is one utility that stands above all others in terms of renewable energy.
NextEra Energy, Inc. (NEE): A Utility Stock for the New Age
NextEra Energy (NEE) is the nation’s largest producer of renewable energy and the largest utility in the country. It should be in an ideal position to benefit going forward.
NEE has historically been a superstar performer for a utility. But it has stumbled in recent years as inflation and rising interest rates made utilities an out-of-favor sector. But things are changing fast, and utilities are one of the best-performing S&P 500 sectors YTD. NEE has huge momentum and is up over 33% this year alone.
NEE isn’t just some boring, stodgy electric utility stock with the possible benefit of good timing. It has a long track record of not only vastly outperforming the utility sector, but the overall market as well. Prior to 2023, here’s how NEE’s total returns compared to those of the S&P 500.
How could a utility stock more than double the returns of the market over five- and ten-year periods? It’s not an ordinary utility.
NextEra Energy provides all the advantages of a defensive utility plus exposure to the fast-growing and highly sought-after alternative energy market. It’s the world’s largest utility. It’s a monster with about $26 billion in annual revenue and a $169 billion market capitalization. Earnings growth and stock returns have well exceeded what is normally expected of a utility.
NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar. It accounts for about 45% or earnings and provides a higher level of growth.
Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s the best of both worlds. There is also a huge runway for growth projects. NextEra has deployed $50 to $55 billion in the last few years for growth expansions and acquisitions. It also has a large project backlog.
Since 2006, NextEra grew earnings by an average annual rate of 8.4% and grew the dividend at an average rate of 9.8% per year. That propelled the market returns stated above. The company is targeting 10% earnings growth and 10% annual dividend growth through at least 2025. NextEra has a long track record of meeting or exceeding goals.
All those good things are true about the stock without the anticipated electricity boom. NextEra should be a prime beneficiary as companies look to renewable energy first for growing electricity demand.
