Constellation Energy (CEG 0.11%) is a utility with a massive nuclear fleet and has been one of the top companies hyperscalers turn to for their growing energy needs. The stock surged over the past couple of years, reaching as high as $412 per share, but it has come under pressure recently.
As a wholesale energy seller, Constellation stands to benefit from rising prices. But in an effort to curb rising electricity costs, regulators have proposed caps on electricity rates in the Mid-Atlantic market where Constellation operates. Today, Constellation Energy stock is priced under $290 per share. Does that make it a buy?
NASDAQ: CEG
Key Data Points
Why Constellation Energy's stock is down over the past month
On Jan. 16, Reuters reported that the Trump administration (via the National Energy Dominance Council), along with 13 state governors in the PJM Interconnection region (which serves states across the Mid-Atlantic), agreed on a joint Statement of Principles that would affect energy providers in the region.
As part of this statement, lawmakers encouraged PJM to conduct a one-time emergency auction to secure new baseload power generation, with the plan calling for large technology companies (specifically data center owners and hyperscale cloud operators) to bid for 15-year contracts. In addition, the agreement seeks to extend capacity-market price collars in capacity auctions to prevent residential customers from facing price hikes.
This could impact Constellation, which operates as a wholesale merchant power producer. This means it sells its energy into wholesale markets, and power markets like PJM are highly competitive. And Constellation has a slew of energy assets in the region, so rising prices help boost its growth. Price caps and other interventions in capacity markets could hurt wholesale power producers like Constellation, which is why the stock has been in a decline since January.
Image source: Getty Images.
While the move may cap Constellation's upside from auctions for the 2028-2029 and 2029-2030 delivery years, the company has successfully cleared all its PJM capacity in the most recent 2027–2028 auction, which will generate revenue at the clearing price (at the Federal Energy Regulatory Commission-approved cap of $333.44 per megawatt-day) for that year.
On top of that, Constellation is signing long-term, fixed-price power purchase agreements (PPAs) with hyperscalers to lock in revenue and hedge against volatility in wholesale merchant markets. Over the past few years, it has signed PPAs with Microsoft and Meta Platforms and recently signed a deal with Dallas-based data center owner and operator CyrusOne.
The recent decline makes Constellation a buy
Constellation Energy has been a popular stock in the AI power trade due to its massive nuclear footprint and other energy assets. As an independent power producer, it benefits from rising costs, but regulators' moves could cap its upside.
With all that said, the stock is down 32% from its 52-week high and now trades at a forward price-to-earnings ratio of 24.4, down from its peak of 43.1 times forward earnings a few months ago. The company continues to lock in deals and should continue to benefit from strong energy demand in the coming years, which is why I think Constellation stock is a buy today while it's under $290 per share.
