Justin Paget
The owner of North America’s largest producer of wind and solar energy and America’s largest electric utility, NextEra Energy (NYSE:NEE) is well-positioned to benefit from multiple, strong trends going forward. Specifically, the firm should get a lift from data centers’ increased demand for clean energy, higher demand for electricity in general due to the proliferation of AI and battery-powered vehicles, and continued population growth in Florida, where NextEra’s utility, Florida Power & Light, is located. Also, importantly, large investors on the Street are very bullish on the outlook of large electrical utilities at this point, largely due to the rapid growth of data centers amid the AI boom. In the wake of the latter phenomenon, NEE stock has rallied a great deal this year, and there’s no indication that the trend will stop anytime soon.
On the regulatory front, tariffs and a return of former President Donald Trump to the White House could undermine NextEra’s renewable energy business in some respects. But history, along with Republicans’ likely interest in keeping most of the Democrats’ energy tax breaks intact, indicate that any damage to NextEra from a potential return of Trump would be minimal. Moreover, NextEra could very well get a big boost from an initiative called permitting reform which may be passed by Congress in the coming months.
Given the company’s strong growth outlook, I believe that its valuation is attractive, and I would recommend buying the shares.
Higher Electricity Demand, Prices Should Boost NextEra Stock
As I mentioned in the introduction, the growth of U.S. electricity demand is expected to significantly accelerate going forward. After remaining largely flat for most of the past 20 years, U.S. electricity demand will climb 9% “by 2028,” consulting firm ICF estimated on Sept. 12. What’s more, ICF expects average U.S. power prices to advance by an average of nearly 20% between 2025 and 2028. Of course., NextEra, whose business consists of selling electricity, is very well-positioned to benefit from these trends.
Meanwhile, many data center operators are using renewable energy to power their facilities, creating a great deal of demand for NextEra’s renewable energy. Illustrating this point, Morgan Stanley analyst David Arcaro, speaking on NextEra’s Q2 earnings call, stated that, “We’re hearing utilities around the country now with fast growing pipelines, thousands of megawatts of data center requests. It seems to be moving rapidly just month by month they seem to be learning more, getting more demand.” And Rebecca Kujawa the CEO of NextEra Resources, NextEra’s renewable energy subsidiary, answered that the electric utilities which buy NextEra’s power are indeed getting requests for large amounts of power from data centers.
And showing that NextEra can benefit from this trend, the company last quarter sold more than 3 gigawatts of electricity from its renewable projects, representing the second-highest total of any quarter in its history. Of the 3 gigawatts, last quarter, 860 gigawatts came through an order with Alphabet (GOOG)(GOOGL), which will use the electricity to power its data centers. In light of data centers’ large, growing demand for clean energy, there’s a good chance that NextEra will make one or two more similar, huge deals in the medium term.
FPL, meanwhile, is benefiting from Florida’s relatively high population growth, as the number of residents in the state increased by about 1.5% in each of the years 2020, 2021, and 2022. Also noteworthy is that FPL’s return on equity has been more than 10% in the last five years, versus U.S. utilities’ average ROE of 9.5%.
The Street Is Bullish on Electric Utilities
The Utilities Select Sector SPDR Fund ETF (XLU), an electric utilities ETF, had jumped 22% in 2024 as of the market close on Sept. 12. NextEra has definitely been invited to the party, as its shares had soared 37% in 2024 as of Sept. 12. With data centers’ thirst for power continuing to rapidly expand, this trend should continue for the foreseeable future.
Utilities, which tend to pay hefty dividends, will also be helped by declining interest rates, since lower rates make their payouts more attractive. NextEra is no exception to this rule, since its shares have a forward dividend yield of 2.5%.
A Look at Regulatory Issues
In June, a waiver on tariffs on solar panel imports from Southeast Asia imposed by the Biden administration was allowed to expire. In Q4 of 2023, that region provided 84% of all the solar panels imported by the U.S. But the U.S. imported an extraordinarily large amount of solar panels in anticipation of the waiver expiring, so NextEra should not have to shell out too much for panels for some time. What’s more, Vice President Kamala Harris, who’s intent on reducing America’s carbon emission and has many supporters in Silicon Valley which needs solar for its datacenters, may very well institute a new waiver on solar panel imports from Southeast Asia if she wins. Finally, with electricity prices likely to climb and Big Tech intently looking for renewable power for their datacenters, NextEra will likely be able to increase the prices of its power to compensate for any increases in the prices of solar panels.
As far as Trump is concerned, he has expressed some hostility towards solar energy, and he may very well raise the tariffs on solar panel imports. But during his tenure as president, solar energy capacity grew rapidly in the U.S. For example, in 2019, “solar accounted for nearly 40 percent of new electrical production nationwide.” And although there has been speculation that, with Trump in the White House, Republicans could repeal solar tax breaks, many Republican states, private investors, and major companies have benefited from the Democrats’ tax breaks for green energy. In fact, even Trump’s son-in-law, Jared Kushner, has invested in “a clean energy fintech firm.” Therefore, I think the chances of the tax breaks for renewable energy getting repealed are low.
Finally, there’s currently a bipartisan push in Congress to make it easier for energy projects to obtain permits. Due to the lengthy process currently needed to obtain permits, it takes a long time to connect solar panels and wind turbines to the grid. If this process is shortened, NextEra could obtain much more solar and wind energy to sell to data center operators and others in the coming years. Such a development, in turn, could greatly boost its top and bottom lines.
Valuation and Risks
NextEra has a forward price-to-cash-flow ratio of 12.7 times. That’s meaningfully above the sector average of 8.1 times. But NEE is likely seen as being part of the electric utility sector, and the company’s ability to benefit tremendously from the strong, growing demand for renewable energy greatly differentiates it from other utilities. Providing evidence for this point, the company’s cash from operations jumped 27% last quarter versus the same period a year earlier to $3.93 billion. In light of the company’s strong growth and powerful potential, I believe that its valuation is currently attractive. As a result, I urge investors to buy the shares as long as they remain below the $95 level. At the latter price, absent any major changes in the firm’s business, its valuation would become excessive for investors.
On the risk front, Trump could impose higher tariffs than I expect on solar panels, and the Republicans could take away all the tax breaks for solar power. Such moves could cause NextEra’s top and bottom-line growth to decelerate going forward. Additionally, the expansion of data centers and battery-powered vehicles could greatly decelerate going forward, preventing the demand for electricity from increasing as most expect at this point.
Credit: Source link
