Will AI Exposure Boost this Nuclear Stock?
A recent agreement with Amazon could offer Dominion Energy significant exposure to the AI boom.
While artificial intelligence (AI) has driven a stock market boom with the promise of radically improved productivity, one drawback is the amount of energy needed to power the data centers where large language models such as GPT are trained.
This, however, is creating a related bull market for the energy providers that can satisfy this demand. As developers of AI models go nuclear for their energy generation, companies like Dominion Energy [D] could be poised to benefit.
Amazon Goes for the Nuclear Option
Dominion Energy is a diversified energy company. It produces some non-renewable forms of energy,[1] but is increasingly involved in the production of renewable energy such as solar, wind, hydroelectric and biomass,[2] as well as — crucially — nuclear energy.[3]
This last source could potentially expose Dominion — otherwise a relatively run-of-the-mill utilities stock — to the AI boom that has driven stock markets for nearly two years.
On October 16, Amazon [AMZN] signed a deal with Dominion to explore the development of a small modular nuclear reactor (SMR) near its existing nuclear power station in North Anna, Virginia.[4] The SMR will help Amazon’s cloud subsidiary, Amazon Web Services, to power the expansion of its AI services, as well as help Amazon reach its net-zero targets, according to CNBC.
Recent Stock Performance
Dominion stock gained 5.10% on October 16, with investors buoyed by the news tying Dominion’s services directly into the AI boom.
Dominion’s share price has gained 34.71% in the year to date, and 60.51% over the past 12 months.
As of October 23, the stock is trading at its highest level since the second half of 2022. The question investors might ask is: is its current valuation justified compared to its peers?
Measuring Dominion’s Fundamentals
Two of Dominion’s closest competitors, particularly in the nuclear energy space, are Centrus Energy [LEU] and BWX Technologies [BWXT]. Centrus Energy provides nuclear fuel and services for the nuclear power industry,[5] while BWX provides components and products for nuclear power.[6]
Dominion compares favorably to both stocks. Not only does it have the largest market cap, but it also has the lowest P/S ratio, as well as the highest projected revenue growth next year.
Dominion Energy Stock: The Investment Case
The Bull Case for Dominion Energy
Dominion is favorably priced compared to its peers in the nuclear and utilities market, but its status as a potential AI play means that it can also be compared to stocks in that industry.
Here, its valuations are highly reasonable by comparison. Chetan Woodun published an analysis in Seeking Alpha on October 14 showing that AI plays have an average P/S ratio of 14.9, 4.2 times that of Dominion’s.[7]
While its status as a utility means it is unlikely to grow its earnings at the same breakneck speeds as these companies, it also conveys a degree of defensiveness to Dominion. In other words, it is a relatively safe AI stock — it might not have as much to gain as companies like Nvidia [NVDA], but there may also be lower downside risk in the stock.
The Bear Case for Dominion Energy
There is one serious risk that Dominion Energy faces as it expands its production capacity to meet growing AI data center demand: that demand could stop growing.[8]
As things stand, the costs of the extra energy demand will be borne by the companies that are buying it to build their models. This justifies significant capital investment into grid capacity on Dominion’s part, but it could take years for this investment to pay off.
If, in the meantime, AI’s demand for electricity falls — for example, thanks to a technological breakthrough that substantially improves the energy efficiency of AI model training — then utilities companies like Dominion will be left carrying the can. Local residents could pay the price for the overbuilt grid through elevated electricity prices, but states could insist that suppliers like Dominion shoulder some of the burden.
Analyst price targets also reflect a glum outlook for the stock. The median target of $58.00 among analysts polled by LSEG implies a decline of 4.8%% over the next 12 months.[9] A high target of $62.00 envisages just 1.8% upside, while the most pessimistic target of $49.12 suggests the stock could fall 19.4% over the next year.
Conclusion
Dominion’s nuclear arm could potentially give it exposure to the AI boom, while maintaining the relatively low fundamental ratios of a utilities stock. While this combination holds obvious appeal to investors, there are risks involved, particularly those associated with Dominion’s sunk costs should AI power demand fall.
[1] https://www.dominionenergy.com/projects-and-facilities/power-stations
[2] https://www.dominionenergy.com/projects-and-facilities/renewable-projects
[3] https://www.dominionenergy.com/projects-and-facilities/nuclear-facilities
[4] https://www.cnbc.com/2024/10/16/amazon-goes-nuclear-investing-more-than-500-million-to-develop-small-module-reactors.html
[5] https://edition.cnn.com/markets/stocks/LEU
[6] https://edition.cnn.com/markets/stocks/BWXT
[7] https://seekingalpha.com/article/4726649-dominion-energy-stock-value-play-ai-ecosystem
[8] https://seekingalpha.com/article/4726414-dominion-energy-no-dividend-growth-expected-despite-surging-demand
[9] https://markets.ft.com/data/equities/tearsheet/forecasts?s=D:NYQ