Up 200%, Is Vistra Stock Still a Buy?

With shares up 200% year to date, Vistra (NYSE: VST) recently surpassed Nvidia to become the S&P 500's top-performing stock in 2024. While this utility company is far from a traditional artificial intelligence (AI) stock, it could help meet the growing need for affordable clean energy as power-hungry AI tech becomes mainstream. Let's dig deeper to see if the recent hype is justified.

What is Vistra?

Vistra is an Irving, Texas-based utility company that got its big break in early 2024 with the acquisition of Energy Harbor. This $3.43 billion deal gave the company four nuclear-generating facilities and the second-largest energy-storage capacity in the United States with 1,020 megawatts (MW). The well-timed acquisition put Vistra in the right place at the right time to benefit from the generative artificial intelligence hype cycle.

While tangible results are arguably yet to materialize, many analysts believe AI will transform the world as we know it. Research from Bloomberg suggests the opportunity could grow at a compound annual rate of 42% to $1.3 trillion by 2023 as it finds use cases in industries ranging from advertising to infrastructure development.

But even if the AI industry only reaches a fraction of these lofty projections, one thing is certain: It will need a lot of electricity.

Clean energy is needed

Large language models (LLMs), like ChatGPT, are remarkably energy intensive, with an AI-powered search query using roughly 10 times more electricity than a Google search. The World Economic Forum estimates that the computational power needed to sustain this technology doubles every 100 days. This is contrary to the goals of many governments, which want to reduce carbon emissions and tackle climate change.

Vistra's new nuclear portfolio could help solve both problems. Unlike traditional electricity sources like coal or natural gas, nuclear plants produce little-to-no greenhouse gases. They can also be more reliable than clean alternatives like solar or wind because they can operate at all times of the day regardless of weather conditions.

Capital is flowing into the industry, with tech giants investing directly in their future energy sources. This month, software giant Microsoft inked a 20-year deal with Constellation Energy to reopen Pennsylvania's Three Mile Island Nuclear plant to help power Microsoft's AI data centers. While Vistra has yet to ink such agreements, the growing acceptance of nuclear energy could boost its plant's profit potential and valuation.

How is the business performing?

Hype and future potential are great, but they mean very little if a company's operational performance doesn't match up. The good news is that Vistra's results are solid. Second-quarter revenue grew 21% year over year to $3.85 billion, while operating income surged 37% to $808 million. The company is also optimistic about its future.

Image source: Getty Images.

Over the coming decade, management expects evolving environmental regulations to spark significant closures of (relatively dirty) coal power plants. These trends could lead to a supply gap that Vistra plans to help fill. And its long-term strategy isn't limited to nuclear energy.

The U.S. Energy Information Administration estimates that natural gas emits almost 50% less CO2 than coal, making it an important piece in solving the clean-energy puzzle. And Vistra plans to expand its gas capacity to help meet rising demand -- targeting 2,000 megawatts of new generation in the Texas market alone. The combination of rising AI-related demand and environmental protections could help the company maintain its strong operation momentum over the coming years.

Is the stock a buy?

It usually isn't a good idea to buy stocks that have already soared 200% in a short time frame because that type of action suggests hype may be getting ahead of fundamentals. That said, Vistra's valuation still looks reasonable. With a forward price-to-earnings (P/E) ratio of 16, shares are cheaper than the S&P 500 estimate of 23. And the stock looks like a great way to bet on America's clean energy transition.

Should you invest $1,000 in Vistra right now?

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool has a disclosure policy.