Shares of Brookfield Renewable Partners (BEP +2.87%) rallied as much as 6.9% on Friday before settling into a 4% gain as of 2 p.m. ET.
The renewable energy master limited partnership, which owns various types of renewable energy assets in hydroelectric power, solar, wind, distribution, and storage, beat analysts' estimates for revenue and funds from operations (FFO). Moreover, it inked a huge contract to supply renewable power to the current leader in artificial intelligence cloud computing.
NYSE: BEP
Key Data Points
Energy needs are taking off due to AI data centers
In the first quarter, Brookfield saw revenue rise 12% to $1.49 billion, beating estimates by $60 million, and funds from operations of $0.45 per share rose 8%, beating estimates by $0.03. Management cited the company's diverse asset base and inflation-linked power purchase agreements as the reason behind the strong results, and forecast FFO to grow by over 10% this year.
In addition to the stronger results, management hailed the company's "landmark" agreement with Microsoft that was just signed early this month. The agreement calls for Brookfield Renewable to supply Microsoft with 10,500 megawatts of power to supply Microsoft's AI and cloud data center operations in the U.S. and Europe between 2026 and 2030.
AI data centers consume a huge amount of energy, and large cloud and AI companies are looking for ways to power them with renewables. That dynamic should help fuel demand for Brookfield's assets for years to come.
Of course, Brookfield is highly dependent on interest rates as well, as it buys projects with equity and debt while also paying out most of its cash flow as a distribution to unitholders. Currently, Brookfield's distribution yield is 5.7%.
Rate-sensitive stocks also got a boost today after the April jobs report showed only 175,000 jobs were added last month, below the 240,000 expected. Why would that be a good thing for Brookfield? Because a softer jobs report may help tame inflation, which may enable the Federal Reserve to begin lowering interest rates sooner rather than later. Recent hotter-than-expected inflation readings had sparked an April sell-off in stocks on fears interest rates may stay higher for longer.
Lower interest rates benefit the valuations of all stocks, but especially capital-intensive dividend stocks such as Brookfield.
Brookfield and interest rates are intertwined
Brookfield has a solid reputation as a savvy operator and capital allocator, so it's no surprise to see it outperform analyst expectations and ink deals with high-profile customers. However, the stock remains 53% off its all-time highs set back in 2020. Unsurprisingly, that's when interest rates had fallen to historic lows.
So while Brookfield may look enticing now and may turn around on potential interest rate cuts, just be aware that there are many stocks that are essentially interest rate plays. Investors in Brookfield should also keep in mind the interest rate risk inherent in its business.
