Artificial intelligence (AI) requires lots of computing power. Computing power requires lots of electricity. That's the simple reason why so many investors have been buying shares of Vistra (VST +3.88%) lately. Shares of the power generation company are up more than 750% over the last five years:
NYSE: VST
Key Data Points
However, there are a lot of differences among power companies, and Vistra has some unique quirks that a lot of potential shareholders don't know about. Here's what investors need to know before buying Vistra shares.
Vistra is not a regulated utility
When investors think of a power company or an electricity generator, they generally think of regulated utilities: companies that operate on regulated contracts to provide power to customers in a certain geographic area. That's not what Vistra does. Instead, Vistra is a "competitive" power generation company -- the largest in the U.S., in fact. What that means is that instead of providing the electricity it generates to a fixed group of customers at a fixed, regulated rate, Vistra sells the electricity it makes on the open wholesale market.
Some of Vistra's customers are utilities that need extra capacity to satisfy their own customer demand. Other customers are big corporations that want to guarantee a source of power for their operations. In some cases, Vistra also sells directly to residences or businesses through one of its subsidiary brands. Ever get a letter in the mail trying to convince you to switch away from your local utility to a different electricity provider? That may have been sent by one of Vistra's brands.
On the one hand, this means Vistra isn't contractually locked into a given rate, so if demand for electricity goes up -- as is currently happening across the country -- Vistra can charge more for its electricity. On the other hand, Vistra's customers aren't necessarily locked into a given rate either, so if the open market rates go down due to lack of demand or oversupply, Vistra will take a hit. Vistra's management is very conscious of this and uses strategic hedging on almost all of its generation to lock in favorable pricing and reduce its risk.
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Vistra is diversified, growing, ... and expensive
While natural gas power plants make up 59% of Vistra's generation capacity, one reason the company has excited investors is its diversified generation portfolio. Nuclear energy -- a zero-emission power source -- makes up 16% of Vistra's portfolio. And even though solar and wind production make up just 4% of Vistra's current portfolio, the company has inked deals with tech hyperscalers to provide them with solar power, including a 200MW facility in Texas for Amazon and a 405MW site in Illinois for Microsoft.
The company's mix of generation methods, the large geographic footprint of its power generation portfolio, some strategic acquisitions, and, of course, rising electricity demand have caused Vistra's revenue and profits to nearly double over the last five years. However, at the same time, its price-to-earnings ratio has nearly quadrupled to 60 times trailing earnings, which is much higher than the industry average. Vistra is likely to keep growing, but investors should be aware they're paying a premium price for that growth.
