Chevron and Exxon Are the Next Hot AI Stocks. Here’s Why - barrons.com
AI needs power—and lots of it. Utilities have been focusing on upgrading and restoring mothballed power generators to handle the new power needs. It’s unlikely that utilities will be able to get from here to overbuilding anytime soon.
Investors may be underestimating just how much power is needed. Data centers are just the beginning, according to 22V Research’s Jordi Visser, who sees it being used in robots, self-driving cars, smart appliances, and other products that will require even more power. “Unlike traditional data centers that are concentrated and centrally planned, embodied AI will generate a vast, decentralized layer of 24/7 compute demand embedded in warehouses, hospitals, homes, vehicles, and factories,” he writes. “These edge applications won’t tolerate latency or downtime, making local, dispatchable power essential.”
The change has been significant enough to cause a repricing of independent power producers across the utility sector. Vistra now fetches 25.1 times 12 month forward earnings, up from 15.5 times one year ago, while NRG Energy trades for 18.6 times, up from 11.3 times. And it’s a big reason that Raymond James initiated the two stocks with Strong Buy ratings and Constellation and Talen Energy at Outperform. “We continue to like the setup for most names on the broader power theme,” Weston writes.
Exxon and Chevron, however, are still viewed as stodgy oil companies, not AI beneficiaries. That could change, 22V’s Visser claims. He argues that both companies are primed to benefit from demand for natural-gas-fired power, especially if there is likely to be an energy shortfall. Chevron, for instance, has partnered with GE Vernova and Engine No. 1 to expand gas power for data centers, Visser says, while Exxon has touted its ability to supply power to Big Tech firms long before nuclear power can become a realistic option.
“Despite these developments, the market continues to value Chevron and Exxon Mobil primarily as cyclical oil companies,” Visser writes. “It has not yet priced in the possibility that these firms will become direct electricity suppliers to hyperscalers, a role that could warrant higher valuation multiples.”
Even following their recent surge thanks to rising oil prices, Chevron and Exxon trade at 17 and 16 times 12-month forward earnings, respectively. If an AI premium gets included in the stock, they could be worth a heck of a lot more. |
