Talen Energy Corporation shares have doubled this year as the Houston-based company charts a path for nuclear plants to power the data centers that tech companies rely on to support artificial intelligence. Talen stock has soared 103% since January, through Wednesday, giving it a market capitalization approaching $7 billion. Investor interest in Talen has climbed since it signed a $650 million deal in March with Amazon Web Services to sell the cloud computing company a data center campus powered by the Susquehanna nuclear plant in Berwick, Pennsylvania. Talen's stock has risen nearly 52% just since the AWS deal was disclosed. And the power company's shares may have more room to run, with Oppenheimer rating the stock an outperform with a 12-to-18 month price target of $140, implying about 8% upside from Wednesday's close of $129.81 per share. Talen became an independent power company in 2015 after PPL Corporation spun off its power plants in Pennsylvania and Montana to focus solely on its regulated utilities business. But Talen had a rough start, filing for bankruptcy in 2022 after surging natural gas prices left it with losses tied to derivative contracts it has used to smooth out risk. Talen restructured, brought on Mac McFarland as CEO in 2023, started selling non-core assets and settled a lawsuit against PPL. "They've really been doing a good job of cleaning up the company, narrowing the focus, monetizing assets where they can, and then returning cash to shareholders," Ian Zaffino, senior research analyst at Oppenheimer, told CNBC Wednesday. Riding AI wave Talen is now riding the AI wave, with its AWS data center deal viewed as a potential model for how the power industry can meet the tech sector's growing energy demand for reliable, carbon-free nuclear power. The AWS data center campus will supply 960-megawatts of power when completed, nearly the size of the average nuclear reactor in the U.S. "Our one deal matters because data centers form in multi-site clusters, so we hope that proving one working model in Pennsylvania is a sign of good things to come for further buildout," McFarland told analysts on Talen's second-quarter earnings call this week. Data centers represent a major opportunity for economic development, the CEO said, with each gigawatt representing roughly $10 billion in direct investment, and the total impact multiple times higher than that when indirect jobs and investment are included. "It's really an enormous opportunity," Zaffino said of the AWS deal. It could add $225 million in incremental earnings before interest, taxes, depreciation and amortization for Talen if Amazon builds out the entire campus, though this will take years, the analyst said. Talen's EBIDTA guidance for 2024 is $750 million at the midpoint. TLN YTD line Talen Energy The AWS deal faces a challenge from American Electric Power and Exelon at the Federal Energy Regulatory Commission (FERC). AEP and Exelon argue that the agreement could reduce capacity on the grid and create scarcity, resulting in rising energy prices. They also argue that the agreement presents a free rider problem in which the data center and nuclear plant benefit from the grid without paying their share of the costs. For its part, Talen accuses the two utilities of trying to stifle innovative solutions to the power demand challenge presented by data centers that have huge energy needs. Other independent power companies such as Constellation Energy and Vistra Corp . defend Talen's agreement with AWS in filings to FERC, demonstrating how the deal is viewed as a potential turning point for the industry. Constellation Energy and Vistra have said they are holding similar conversations with tech companies on potential agreements to directly power data centers with their nuclear assets. In all likelihood, federal regulators are likely to accept the Talen-AWS agreement, even though Talen faces potential risks, Zaffino said. "The AI trade, all the stuff surrounding this data center deal is a very, very large part of the thesis," the Oppenheimer analyst said. "There's obviously risk of an AI bubble or something along those lines," he said. In addition to the Susquehanna nuclear plant, Talen owns seven natural gas plants , two coal plants and has stakes in several other coal-fired power stations. McFarland has said this year that Talen is also looking at the possibility of powering data centers with its natural gas assets. The CEO said this week a model could develop in which tech companies effectively underwrite the construction of new gas plants by entering into long-term contracts for power before they are built. Beyond data centers, power demand is rising elsewhere in the U.S. just as supply is increasingly constrained. The nation's largest grid operator, PJM Interconnection, recently held a capacity auction in which prices soared to $269.92 per megawatt-day, nearly 10 times the price of the previous auction. That puts Talen's core business, providing power, in a "really, really good spot," Zaffino said. The Susquehanna-AWS deal is layered on top of Talen's core business, with the potential for something similar at the company's Lower Mount Bethel and Martins Creek natural gas plants in Pennsylvania, he said. "It's quite a large opportunity," Zaffino said.
