Goldman Sachs' Analysis of US Utility Stocks: Not All Utility Stocks Are Created Equal
AI Data Center Beneficiaries: American Electric Power (AEP) and Exelon (EXC) Face Diverging Fortunes
Recently, the utility (electricity) sector has emerged as a hot theme due to the surge in electricity demand driven by AI and data center expansion. However, Goldman Sachs advises that careful stock picking is necessary even within the same utility sector. Here's a summary of the contrasting evaluations of American Electric Power (AEP), which demonstrated clear growth in its earnings announcement, and Exelon (EXC), which left something to be desired.
■ American Electric Power (AEP) (Buy): A True Beneficiary of Data Center Electricity Demand
Target Price: Upgraded from $133 to $141
The key investment point is the overwhelming increase in electricity demand contracts. In its Q4 earnings announcement, the company doubled its confirmed large-scale power supply contract volume for 2030 from the existing 28GW to 56GW. This is evidenced by actual contracts with data centers, including the signing of a 36GW Letter of Intent (LOI) in the Texas (ERCOT) region, not just inquiries.
In the utility industry, increased capital expenditure (Capex) directly translates to earnings-based growth. American Electric Power (AEP)'s announcement of an additional $5 billion to $8 billion in capital expenditure opportunities by 2030 is interpreted as a strong signal (upside risk) of structural earnings growth through the expansion of transmission and generation facilities.
■ Exelon (EXC) (Sell): Reduced Pipeline and Shareholder Value Dilution
Target Price: $43 (downward revision compared to the current price of approximately $44.45)
While Exelon (EXC)'s Q4 earnings exceeded market expectations, concerns arose due to the shrinking future pipeline. The potential data center power supply volume was lowered from over 47GW to approximately 43GW. Furthermore, the proportion of actual Transmission Service Agreements (TSA) signed out of the 18GW of highly probable pipeline was only 45%, contrasting with American Electric Power (AEP)'s aggressive expansion.
In addition, a funding plan that undermines shareholder value acted as a negative factor. The company announced that it would finance 40% of its capital expenditures over the next four years through stock issuance (USD 850 million annually, totaling USD 3.4 billion), inevitably diluting the equity value of existing shareholders.
Insight & Comments
This report shows that the time when all utility stocks would rise equally simply because they were riding the AI data center theme is over. The market has now begun to coldly assess actual order data and funding methods, moving beyond vague expectations.
The Quality of Contracts Determines Stock Prices
The valuation gap is likely to widen further between companies like American Electric Power (AEP), which proves its numbers with actual Letters of Intent or Transmission Service Agreements, and companies like Exelon (EXC), whose simple pipeline (potential demand) size is stagnant.
The Two Sides of Infrastructure Investment: Rights Offering Risk
Massive capital is required to expand transmission networks and power plants. The key is how these costs are financed. If a company chooses a large-scale stock issuance (rights offering) like Exelon (EXC), the overall pie of the company may grow, but the per-share value held by individual shareholders will inevitably fall. Even investments for growth can be detrimental from a shareholder return perspective.