Artificial intelligence is expected to change the world, which it very well could.
The technology amounts to what is simply a very complex computer program.
Computers need one specific thing to operate properly and reliably: electricity.
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Wall Street has decided that artificial intelligence (AI) is going to change the world as we know it. That’s not unreasonable to believe, but in true lemming fashion, investors are flocking into stocks that they believe will be AI winners. But it is still early days for the technology, so it is hard to predict which companies are best positioned to benefit.
Except, there is one group of companies that will definitely see demand increase. And one company in that group is better positioned than any other to take advantage: Dominion Energy (NYSE: D). Here’s what you need to know.
Image source: Getty Images.
Aside from AI’s ability to replace human employees, the big problem with AI right now is that the technology is still evolving. It is developing quickly, for sure, but there’s no way to really know how best to use it. Or which companies will have the best AI technology to offer the world.
If you want to understand the risk, look no further than Yahoo! It was the leading internet search company until Alphabet’s Google search service came around. Nvidia is an AI icon today, but it may not always be the industry’s big winner. In other words, the early winners in AI could still end up being long-term losers. And bad investments, if you buy them.
But there’s something that is very clear about this new technology. It runs on computers, often housed in massive data centers, and computers need electricity to operate. AI, along with other electricity-dependent technology, is expected to lead to a step change in electricity demand.
To put some numbers on that, U.S. electricity demand from AI alone is projected to increase 300% over roughly a decade. And the overall growth in electricity demand is expected to increase from 9% between 2000 and 2020 to 55% between 2020 and 2040. That’s not a step change in demand in the utility sector, it is a leap change!
As the AI tsunami washes over the world, there’s one region that is going to benefit disproportionately. That region is Virginia. You might not have guessed that, but Virginia is one of the largest data center markets in the world. AI “lives” in data centers. Dominion Energy operates a regulated electric utility in Virginia, giving it a monopoly on serving the power needs of these data centers.
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How big an opportunity is this for Dominion Energy? Well, in the second half of 2024 demand from data centers grew 88%. There’s a problem with that number, though. Dominion can’t just send out 88% more power, especially given that most of the data centers are going to be new buildings. It has to build generating capacity and construct the power lines needed to get that power from where it is generated to where it is going to be consumed.
That process takes time. And it requires Dominion to work with its regulators on the rates it charges and more importantly, on its capital investment plans. Slow and steady growth is the likely outcome, but AI demand suggests that growth is going to be less slow in the future than it has been in the past. Dominion isn’t going to turn from an income stock into a growth stock, but it could become an attractive growth and income stock.
The most exciting part of Dominion’s story, however, is that it is out of favor on Wall Street right now. The average utility has a dividend yield of around 2.7%. Dominion Energy’s yield is 4.4%. Okay, a dividend cut and zero near-term dividend growth is part of the story, here, too. But management has slimmed down the business to where it is basically just a plain vanilla, regulated electric utility. There’s a reason why the stock is unloved, but there’s also a reason to expect the future to be better than the past since there’s now a strong business foundation in place.
NVDA data by YCharts
Essentially, Dominion Energy is a low-risk turnaround story in the utility sector. But its turnaround story has a hidden booster rocket in the form of AI, given the company’s well-located Virginia operations. If you prefer to think long term while other investors are focused on the short-term profits they expect from AI stocks, you might be better off buying Dominion.
Yes, Nvidia’s shares are up 50% in just six months, compared to Dominion’s 6%. But how long can Nvidia keep up its stellar performance and at what point is too much good news priced into the stock? The hype is real and it could be distorting the way Wall Street sees AI companies like Nvidia.
Dominion, in comparison, is an anti-hype stock. But if you buy Dominion, you can collect a fat dividend while the business benefits from the AI revolution, helping the utility get its business back on a steady growth path.
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Reuben Gregg Brewer has positions in Dominion Energy. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
Want AI Exposure Without the Hype? This Stock Is a No-Brainer Buy was originally published by The Motley Fool
