Utilities surged in 2024 as investors sought a way to play the burgeoning artificial intelligence trend, but attractive opportunities still exist for those willing to do the legwork, according to Morningstar energy and utilities strategist Travis Miller. The utilities sector climbed nearly 20% last year, led by the likes of Vistra Corp . and Constellation Energy as investors viewed both companies as standing at the forefront of powering data centers and artificial intelligence. Vistra soared nearly 260% in 2024, while Constellation leapt more than 90%. Talen Energy is also among the big beneficiaries of the AI and data center trend. Its shares added more than 200% last year. TLN 1Y mountain Talen Energy shares in the past year The enormous surge in market value may suggest that these energy providers are a little too hot, however, said Miller. "The valuations for the unregulated power producers are far too rich relative to what we think the long-term growth potentially is." Indeed, among those three AI power players, Vistra is the only one that hasn't announced any formal deals to supply data centers with power generated by nuclear energy, Miller said. Talen has inked an agreement to power an Amazon data center, and Constellation reached a power agreement with Microsoft that would restart the Three Mile Island plant in Pennsylvania. Instead, investors seeking utilities that offer a combination of growth and income ought to look at the midcap space. "We think the best opportunities are in the midcap utilities," Miller said. "Just a few percentage points of demand growth can have a material impact on earnings growth for some of the midcap utilities." Overlooked opportunities Midcaps are a sweet spot in the world of utilities, as their valuations currently don't reflect the potential upside these companies can see if they win just one or two data center deals. "Large cap utilities will need to sign contracts and execute a lot of data center projects to move the needle," Miller said. On the other end of the spectrum, small cap companies face financing risk when building out their infrastructure, he added. Indeed, smaller players could still be pinched by high financing costs in 2025 as the outlook for interest rate cuts becomes less rosy. "We often see that utilities that take on very large projects or need a lot of infrastructure fall behind and go over budget, which takes away from investors' returns," Miller said. "So the best picks are going to be utilities that can execute and that can reduce their execution risk as data center growth becomes a bigger trend." The strategist highlighted three names that fit the bill: NiSource , WEC Energy and Evergy . NiSource advanced 38% in 2024, and still offers a dividend yield of 3%. Of the 16 analysts covering the Indiana-based utility, 14 rate it a buy or strong buy, according to data from LSEG. Consensus price targets see upside of about 6% from current levels. Last June, Indiana Governor Eric Holcomb announced that Microsoft would invest $1 billion to establish a data center in the state. Nipsco, a subsidiary of NiSource, will deliver electricity and natural gas to the facility. "It's possible they can do a couple more data center deals," Miller said. "There's a lot of earnings growth opportunity from NiSource." WEC Energy, another midcap utility, saw shares rise nearly 12% in 2024. The stock has a dividend yield of 3.8%. Eleven of the 19 analysts covering WEC deem it a hold, with the consensus price target implying nearly 7% upside, per LSEG. In May, Microsoft announced an expansion of a data center campus in southeast Wisconsin as part of a $3.3 billion investment in cloud computing and AI infrastructure. WEC will supply energy to the facility. Another factor in favor of WEC Energy and NiSource is that both companies generate power using natural gas. "The market turned away from natural gas utilities and the potential for natural gas demand a couple of years ago," said Miller. "But we are seeing a lot of strength in natural gas as prices stay low. It will be needed to generate the electricity necessary for data centers." Finally, Miller highlighted Kansas City-based Evergy. "We think the market is underestimating the amount of growth they could realize from datacenter development," he said. Last May, Evergy announced data center deals with Google and Meta Platforms, as well as an agreement to deliver power to an electric vehicle battery manufacturing plant for Panasonic. In all, the projects represent more than 750 megawatts of load, Evergy said. Evergy's shares rose nearly 18% in 2024, and the stock has a dividend yield of 4.4%. The Street is split on the company, however, with eight of the 14 analysts covering Evergy rating it a buy or strong buy. The consensus price target suggests more than 7% upside from current levels.
