The S&P 500 (^GSPC -1.11%) is up 21.5% in 2024 so far, which is more than twice its average annual return since it was established in 1957. But some stocks in the index are performing even better, especially those participating in the artificial intelligence (AI) revolution.
Nvidia (NVDA -2.09%) stock, for example, is up a whopping 145% this year. It's struggling to keep up with demand for its data center chips that are used to develop AI, and that's driving a surge in the company's revenue and earnings.
But there's one stock in the S&P 500 that is crushing even Nvidia right now. Shares of Vistra (VST -3.07%) have rocketed higher by 205% so far in 2024 -- a single-year performance almost unheard of for a company that operates in the utilities industry. But it's mostly thanks to the AI boom, and here's why.
Nvidia was the top-performing S&P 500 stock in 2023
Nvidia stock ended 2023 with a 239% gain, making it the best performer in the entire S&P 500 for the year. It benefited from a tidal wave of spending from the world's largest data center operators, including Microsoft, Amazon, Alphabet, Oracle, and more, all of which continue to battle for AI supremacy.
Developing the largest AI models -- and therefore the smartest AI applications -- requires significant computing power, and Nvidia's H100 graphics processor (GPU) was the industry's most powerful chip last year. The above data center companies continue to buy the H100, but they are eagerly awaiting a new generation of GPUs based on Nvidia's Blackwell architecture.
Blackwell-based GPU systems like the GB200 NVL72 are set to deliver a performance increase of up to 30 times compared to the H100, and Nvidia CEO Jensen Huang expects them to generate billions of dollars in revenue for his company when they start shipping at scale in the final quarter of its fiscal 2025 (which will run from November to January).
Nvidia is on track to generate $125.5 billion in total revenue in fiscal 2025, which would be a 125% increase from the prior year. But data center spending is still climbing, and Huang believes operators will allocate $1 trillion toward building new infrastructure over the next five years.
All of those data centers are going to drive a surge in demand for electricity, and that's where Vistra comes in.
Vistra is an unlikely beneficiary of the AI revolution
According to Goldman Sachs, a typical ChatGPT query consumes 10 times more electricity than a Google search. That's part of the reason AI data centers could represent 4% of all energy consumption worldwide by 2030, potentially doubling from 2% today.
Vistra is an electricity company based in Texas. It has a generation business that produces electricity through its portfolio of coal, natural gas, solar, and nuclear facilities. It also has a retail arm that distributes electricity to more than 5 million residential, commercial, and industrial customers across 16 U.S. states.
Clean energy sources like nuclear, solar, and natural gas are popular among climate-conscious tech companies. Microsoft, for example, wants to be carbon negative, water positive, and zero-waste across its entire organization by 2030, and it appears to be on track to achieve those goals.
In the second quarter of 2024, Vistra announced it signed two long-term renewable power purchase agreements, one with Microsoft and the other with Amazon. The company will build two large-scale solar facilities to fulfill those deals, but further specifics are not yet available.
Here's something we do know. Microsoft recently signed a 20-year deal for nuclear power with Constellation Energy, and it will pay an estimated $100 per megawatt-hour -- double the going rate today. In other words, Microsoft is anticipating that energy supply will become so tight because of demand from AI data centers, that it's willing to pay a premium to secure its needs for the future.
Image source: Getty Images.
Vistra could end 2024 at the top of the S&P 500, but investors should be cautious
As I highlighted above, there are very good reasons for the powerful bull run in Vistra stock this year. However, based on the company's trailing-12-month earnings per share (EPS) of $3.40, its stock is trading at a price-to-earnings (P/E) ratio of 34.5.
That might pose a problem, because the average P/E ratio for stocks in the S&P 500 utilities sector is around 18.3, so Vistra is quite expensive from that perspective.
According to Wall Street's consensus estimate, Vistra could deliver $4.65 in EPS for the whole of 2024, which suggests its upcoming third and fourth quarters will be much stronger than the year-ago periods. However, that still places Vistra stock at a forward P/E ratio of 25.3.
Even if you calculate Vistra's P/E ratio based on its forecasted 2025 EPS of $6.40, it still comes out to 18.3. In other words, the stock might be fully valued for the next year if Wall Street's projections are accurate (and if the rest of the utilities sector maintains its current P/E ratio).
Plus, many top analysts see limited upside in the stock from here. Morgan Stanley recently lifted its price target to $132, which only represents a potential return of 12% from where Vistra trades today. Analyst firm Jefferies has a slightly higher target of $137, which points to 16% upside.
Vistra could deliver the best gain in the entire S&P 500 this year, but it probably won't shoot the lights out again in 2025 based on its current valuation.
