Image source: Getty Images
The S&P 500’s hit historic highs this month, closing above 6,000 points for the past two weeks running. Up 27% this year, its performance has dwarfed the FTSE 100‘s lacklustre 6.5% growth.
Major US tech stocks such as Broadcom and Tesla have been leading the charge in the past five days, up 40% and 20% respectively.
But looking at year-to-date performance, one under-the-radar company sticks out. Slotted between the usual suspects of Palantir and Nvidia is Vistra (NYSE: VST), the second-best-performing S&P 500 stock this year.
Up 262% since 1 January, it’s streaks ahead of Nvidia’s 163% gain but someway behind Palantir’s mind-boggling 333% gain!
The Texas-based retail electricity company’s probably a big deal in the US. But here in the UK, our news is dominated by headline-grabbing tech giants like Amazon and Apple.
So I decided to do some digging and find out why the stock’s doing so well.
It’s AI again!
Unsurprisingly, Vistra’s performance is intrinsically linked to artificial intelligence (AI). The rapid increase in data centre development over the past year has led to a skyrocketing demand for electricity.
Datacentres house the huge number of servers, GPUs and storage devices that are critical to running AI technologies. They’re essentially massive digital libraries where the internet resides.
With the demand for electricity forecast to keep growing, hedge funds across the US have been pouring cash into energy suppliers.
Vistra operates in the deregulated energy markets of Texas and the Pennsylvania-New Jersey-Maryland Interconnection (PJM). This, combined with its capacity to provide dispatchable power, makes it a preferred choice for US data centres.
Latest results
In its third-quarter results released on 7 November, earnings per share (EPS) and revenue exceeded analyst expectations. Revenue climbed 54% to $6.29bn compared to Q3 2023, while EPS surged 320%, from $1.27 to $5.25.
The results were well received, with the stock rallying 15%. Guidance for 2025 was also raised, with adjusted EBITDA expected to range $5.5bn-$6.1bn and cash flow between $3bn-$3.6bn.
Looking ahead, revenue’s forecast to grow at an average rate of 9.2% a year.
Balance sheet
Vistra’s balance sheet has some worrisome figures, particularly $15.52bn in debt. This is considerably higher than its $8.65bn in equity. Operating income covers interest payments four-fold but it’s still a lot of debt to hold.
For now, it looks manageable but a debt-to-equity ratio below 100% would be more reassuring.
Value-wise, the price looks a bit high, with a price-to-earnings (P/E) ratio of 25.7. The industry average is closer to 15.
That’s not particularly surprising, considering the recent growth. It could suppress growth but with electricity demand increasing, I doubt it’ll be a big issue.
So what’s the catch?
Vistra’s performance is heavily reliant on the AI industry maintaining stability. It’s at risk from unforeseen regulatory hurdles, not to mention energy price fluctuations.
And with the bar now set high, shareholders will expect a lot from the year’s final results. A fall below expectations could spook investors, sending the share price tumbling.
All things considered, I think it’s a big enough company to weather short-term issues. If I had spare cash, I’d buy the stock to diversify my tech-laden portfolio.
I think it’s well worth considering, especially for investors looking for AI exposure beyond the obvious options.
