Global electricity demand is rising rapidly, driven by technologies like AI, data centers, and EVs. 

Data centers, which power AI, consume significant amounts of electricity, one ChatGPT query uses almost ten times as much as a typical Google search. 

Entergy (ETR), a utility company, is set to benefit from this surge, thanks to its diverse and increasingly clean power generation mix. 

However, despite expectations for higher profitability and growth, these positive tailwinds seem already priced in the company’s stock.

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The global electricity demand is set to skyrocket in the coming years, driven by the rapid adoption of emerging technologies like AI, data centers, and EVs.

Data centers, the physical infrastructure supporting AI, consume enormous amounts of electricity. 

In fact, a single ChatGPT query uses nearly ten times the electricity of a standard Google search.

Goldman Sachs estimates that AI data centers alone will account for 0.9% of the 2.4% annual growth in U.S. electricity demand towards 2030. 

This represents a dramatic shift from the nearly flat demand growth seen between 2015 and 2020.

According to the International Energy Agency (IEA), the world will add more than the equivalent of Japan’s annual electricity consumption each year for the next three years, totaling an unprecedented 3,500 terawatt hours by 2027.

Utility companies rarely achieve returns that exceed their cost of capital. They typically earn a set rate on their assets, which doesn’t change much over time.

But recently, expectations for electric utilities have been growing because electricity demand is skyrocketing worldwide.

This surge in demand presents a significant opportunity for utility companies, particularly those involved in electricity generation and distribution.

One such company is Entergy (ETR)…

Based in New Orleans, Entergy operates across Louisiana, Mississippi, Arkansas, and Texas with about 24,000 megawatts of electric generating capacity.

The company recently made headlines when Meta announced plans to build a $10 billion AI data center in Louisiana, which Entergy will power using clean energy sources.

What makes Entergy well-positioned is its diverse power generation mix. The company runs a fleet of 28 active natural gas, oil, hydroelectric, and coal-generating facilities with a combined capacity of nearly 19,000 megawatts.

Its nuclear fleet produces approximately 5,000 megawatts of nuclear capacity. Furthermore, the company also has 8600 megawatts of renewable capacity that is either operating or has been announced and approved.

This variety makes Entergy attractive to tech companies that prefer clean energy for their operations.

The company also benefits from being close to natural gas reserves in Louisiana, Texas, and Arkansas.

This proximity provides fuel security and potentially lower costs compared to utilities in other regions.

It expects significant growth from large industrial customers in the coming years, with data centers leading this expansion.

Historically, utility companies’ steady returns from regulated rates were seen as a safe investment, but they rarely exceeded the cost of capital by a significant margin.

This is also the case for Entergy with the company’s Uniform return on assets ”ROA” never moving above 4% in the past decade.

Today, however, the market is looking at utilities through a different lens, one that values the growth potential brought on by rising electricity demand.

This shift means that even a company like Entergy is now expected to deliver higher profitability and accelerated growth over the long term.

We can also see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will increase to around 5%, an all-time high.

Despite these positive signs, the market seems to have already factored high expectations into Entergy’s stock price.

The shares are at all-time highs, surging more than 40% in the past 6 months. Shares also trade at a very high 73.2x Uniform P/E.

So while Entergy may see increasing profits and faster growth in the coming years, its current stock price already reflects very high expectations.

Even if the company has several strong years ahead, these expectations might be hard to exceed.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research