Shares of Constellation Energy (CEG +1.14%) fell 5.2% on Wednesday.
Constellation has been a hot stock over the past year, as it's the largest U.S.-based nuclear power provider; additionally, Constellation just closed its acquisition of Calpine, which was more concentrated in natural gas and geothermal power, turning the company into a true energy powerhouse.
However, shares fell today after the February Consumer Price Index (CPI) report showed a somewhat surprising month-over-month decline in electricity prices, even as long-term bond yields rose.
NASDAQ: CEG
Key Data Points
Electricity prices fall in February, but are still up year-over-year
Today, the Bureau of Labor Statistics released the February CPI report. While overall inflation grew 0.3% month-over-month and 2.4% year-over-year, the pertinent item for Constellation is the electricity category, where prices fell 0.7% month over month.
The decline was due to warmer February weather after January's winter storms, but the decline still may have surprised investors, given that electricity prices have been a concern amid rising demand from AI data centers. As a result, the entire utility sector was generally lower today.
Also contributing to the sector's decline might have been the rise in 10-year Treasury Bond yields, which increased seven basis points to 4.2%. The war in Iran is pushing up oil prices and perhaps future inflation expectations, despite President Trump's talk that the operation will end "soon" and the news that the International Energy Agency agreed to release 400 million barrels of oil from the strategic petroleum reserve today to stem the rise in oil prices.
Utility stocks are generally seen as "safe" stocks that investors buy for their dividend yields. However, the AI infrastructure build-out has caused investors to give utilities and power producers higher growth multiples over the past couple years. Still, higher Treasury Bond rates may be contributing to today's decline in utility stocks, given that utility stocks "compete" somewhat with bonds for investor attention.
Combine that with the fact that Constellation had garnered one of the highest multiples in the industry, at 41 times earnings, and it's no surprise to see the stock selling off harder than usual, despite no company-specific news.
Image source: Getty Images.
Could this be a buy-the-dip moment?
Despite the month-over-month decline, electricity prices were still up 4.8% on the year, which is higher, obviously, than the overall 2.4% inflation rate for the overall economy. Looking ahead, Constellation's medium-term growth outlook still remains solid, given the high demand for clean energy to power AI data centers, especially nuclear and natural gas, of which Constellation has in spades.
However, there is increasing regulatory risk here. In January, for instance, the Trump Administration, local governors, and the PJM interstate transmission region authorities agreed to cap rate increases on existing power plants while forcing tech companies to backstop the construction of new power sources.
These measures could cap Constellation's growth rate in the near-term, but may also extend that growth runway as tech-backed power plants are constructed.
Overall, Constellation remains a lower-risk way to play AI's electricity demand boom, though it might not have as much upside as other tech plays in the space, especially at Constellation's current valuation.
