Investor Essentials Daily

This utility giant defied industry norms and capitalized on electrification trends

May 14, 2024

Vistra (VST), a utility company, has broken away from the typical slow-growth pattern of the utility industry through its diversified electricity generation assets in key U.S. markets.

With a capacity of approximately 41,000 megawatts, Vistra serves over 5 million customers.

The company has benefited significantly from the increased demand for electricity due to the growth of data centers and the broader trend of electrification.

Between 2020 and 2023, Vistra’s revenue grew by 30% and its EPS by 120%, leading to a 250% surge in its stock price since the start of 2023.

Recently, Vistra was added to the S&P 500. Despite its success, the stock faces high valuation risks and potential challenges from rising interest rates and regulatory changes, suggesting that investors should proceed with caution.

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Utilities have traditionally not been seen as high-growth investments due to their regulated business models and relatively flat demand trends. However, one utility company has defied this conventional wisdom – Vistra (VST).

Vistra generates and sells electricity through its portfolio of natural gas, nuclear, coal, and solar assets located across key U.S. markets.

The company has an electricity generation capacity of approximately 41,000 megawatts and provides power to over 5 million residential, commercial, and industrial customers.

While electricity demand from the traditional residential and commercial sectors grows modestly, two macro trends have created significant tailwinds for Vistra in recent years – the rise of data centers and broader electrification trends across industries.

Data center growth has boomed to support increasing digitization and cloud computing needs.

Goldman Sachs forecasts a 15% CAGR in data center power demand from 2023-2030, driving data centers to make up 8% of total U.S. power demand by 2030. This surge in data center build outs directly benefits Vistra as a major electricity producer.

Separately, the electrification of transportation and various industrial applications is increasing baseline electricity demand.

President Biden has targeted having 50% of all new vehicle sales be electric by 2030, which will require massive investments in public EV charging infrastructure. All of this bodes well for Vistra.

As these macro trends have played out, Vistra has successfully capitalized on the growth. Between 2020-2023, the company grew its annual revenue by 30% from $11.4 billion to $14.7 billion. EPS also jumped 120% over the period.

Buoyed by strong fundamentals, Vistra’s stock price has surged over 250% since the beginning of 2023 alone.

This success story is seen by institutions as well. That is why Vistra is joining the S&P 500, replacing Pioneer Natural Resources (PXD).

This means that the company will be on the radar of more investors who may invest in the stock. Even passively investing in the S&P500 will mean investing in Vistra.

However, this recent surge means there is a significant downside risk.

While Vistra’s long-term story remains intact, the stock’s parabolic rise also brings risks. Our EEA shows that, at over 62x P/E and 2.6x P/B, valuations leave little margin of safety. Sustaining such lofty multiples requires meeting aggressive profit growth targets.

Rising interest rates also pose challenges to servicing the company’s debt outstanding. Vistra will need to diligently manage refinancing risks.

Finally, unforeseen regulatory or political risks could impact the electricity sector.

That is why investors would be wise to approach Vistra with caution, given the lofty valuations and execution risks required to justify the current price. Those with a long-term outlook may find an opportunity but expect volatility ahead.

Best regards,

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

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