When Everything Aligns: Why Vistra Just Earned a Spot on My Best Ideas List

Introduction I don’t think I’m breaking any news when I say that AI requires a lot of energy. This is one of the topics I have spent a lot of time and energy on in recent years, as the market has started to figure out that while we can print money and produce a lot of chips, there’s no way we can “print energy.”  Elon Musk said it best when he explained that he believes a lot of chips will be delivered this year, but will be unable to be used due to power constraints: Chips without power are stranded assets. Think of having a billion light bulbs but not having enough sockets to plug them in. - Elon Musk To give you some data, McKinsey believes that new data centers coming online between now and 2030 will likely consume more than 600 terawatt hours of electricity.  [Inline image] Source: Bloomberg According to the same source, that is enough to power close to 60 million homes. If we assume the average household in the U.S. consists of 2.5 people, that would be the equivalent of housing a population of 150 million people.  Germany, my country of birth, has roughly 80 million inhabitants.  As a result, AI innovators have found out that they need to invest a lot in new power. Since the release of ChatGPT, which was the point when this technology went mainstream, data center construction spending in the U.S. has risen to $40 billion, a number that’s 4x the pre-AI average when data centers were mainly focused on cloud computing. [Inline image] Source: Bloomberg That’s where nuclear power comes in.  First and foremost, I am bullish on natural gas. That power source is readily available, especially in places like West Texas and Appalachia. However, over the next few years, we’ll see a bigger focus on nuclear power, especially as some hyperscalers have already closed deals with companies that have capacity readily available. For that, they are paying a premium: Data centers are willing to pay a premium for that power, leaving generators such as Constellation Energy and Vistra poised for major Ebitda gains from nuclear power deals set at above-market prices. Constellation’s January VPPA with the US General Services Administration – $840 million for 1 million MWh annually for 10 years – implies a contract price of mid-$80/MWh. This equates to $15-$25 above market, assuming wholesale power in the low-to-mid $50s and capacity in the low-to-mid $10s. As Figure 8 shows, if each company contracts half of its nuclear capacity at the midpoint $20/MWh premium, Constellation could get a $1.8 billion annual Ebitda boost and Vistra $500 million. - Bloomberg Now, I think you can imagine where this article is going.  I’m going to tell you why Vistra Energy Corp. (VST) is such a big standout.  The Tremendous Power Of Vistra Energy Vistra Energy is the second-biggest nuclear power player in the United States. It’s only beaten by Constellation (CEG), which has a 22 GW nuclear capacity, more than three times the 6.5 GW nuclear capacity of Vistra.  However, size doesn’t matter, as it’s all relative.  [Inline image] Source: Vistra Energy Corp. The best thing, however, is that it has major operations in the unregulated ERCOT market in Texas. It’s one of the reasons why I don’t invest in most regulated utilities, as I don’t care for their regulated income. Their pricing power is tied to regulators. While it is obviously important to protect consumers, from an investing point of view, I want to own companies that have pricing power and plenty of power, indirectly forcing hyperscalers to become their clients.  In other words, we’re not underwriting a simply 15% EPS growth story here, but a company with a multiple expansion from 12x (a merchant IPP valuation) to an 18-20x digital infrastructure multiple. That’s the real power of Vistra - and Constellation. By the way, IPP means independent power producer.  Here’s the main difference to regulated utilities: In