Reasons for the fall

I’m referring to Vistra Corp (NYSE:VST). The stock is down 24.6% over the last month, but still up 122% over the past year. Vistra’s a US-based energy company engaged in the production and distribution of electricity and related services. 

One reason why the stock has struggled so far in 2025 is due to the rise of DeepSeek, a Chinese AI-model that was reportedly trained and built for a fraction of the cost of other large language models (LLMs). You might think that this story doesn’t really have anything to do with Vistra, but you’d be wrong.

A key reason for the surge in the stock over the past year has come because the energy infrastructure it owns is seen as the future for powering AI projects. The ability to fuel such energy-hungry processors means that Vistra could see revenue significantly increase in coming years. However, the DeepSeek breakthrough caused the stock to fall. If investors have to dial back optimism about how much electricity is actually going to be needed, then maybe Vistra won’t be as profitable as initially thought.

Another factor has been lower electricity prices. The mild winter in the US has further reduced electricity demand, putting downward pressure on energy company revenues.

The long-term view

Despite the short-term negatives, it doesn’t change the fact that Vistra is still hot property. The 2024 results mentioned that “in these 12 months, we closed on a unique acquisition, adding three nuclear sites, approximately one million additional retail customers in the key PJM market and 2,000 new team members”.

The bottom line is that there’s a lot of progress being made at the company, aside from the AI-hype and speculation. The share price will likely continue to be volatile. But I think that it will move back higher this year. As the dust settles on some of the AI concerns, people should realise that Vistra is a profitable utility company.

Further, it’s pushing ahead with renewable energy. Even though this will be attractive for big tech with AI spending plans, it’s also appealing to other corporate customers. So even if AI slows down, it can still do very well with other clients.

Summing it up

Overall, I think this is a dip opportunity worth considering for investors. In contrast to some other AI-related stocks, Vistra has a strong core utility business, which I think makes it more sustainable going forward.

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Looking at the numbers

According to Bloomberg, the average forecast from the list of contributors is 6,614 points. At the moment the index stands at 5,842 points. So this would be a 13.2% rally for 2025. As a result, a £1k investment could be worth £1,132 by year-end.

Some forecasters are looking for greater gains, with others predicting much less. For example, the team at Oppenheimer are top of the tree with its view of 7,100 points! From the data I can see, the lowest target for 2025’s 6,000 points from Cantor Fitzgerald.

It’s true that there’s a wide range of views here. But what strikes me as interesting is that all of these analysts are looking for the index to gain in value this year.

This isn’t to say the index can’t fall. There are several reasons that could cause these forecasts to be upended. For example, US inflation could materially rise. This could cause interest rate cuts to evaporate and investors to get worried about the broader economy.

Where the gains could come from

If the S&P 500 does hit the 6,614-point mark, it’ll likely be partly down to the mega-cap firms continuing to do well. The index is up 23% over the last year, helped by US shares such as Vistra (NYSE:VST).

Vistra’s a US-based energy company engaged in the production and distribution of electricity and related services. It’s a significant provider of energy, but some might look at the 333% jump in the share price over the past year and be a bit confused.

It’s true that normally energy companies of this size don’t see such large stock movements. Yet the driver for Vistra was the fact that the infrastructure is seen as a critical driver behind the energy demand of artificial intelligence (AI). The increasing need to power energy-hungry computers and processors mean that Vistra could see better financial performances in coming years.

Vistra could also help to lead the charge this year for the index and so may be worth considering. However, one risk is that some of the stock’s rally is built on speculation. AI hype could mean the stock’s in a bit of a bubble. If investors don’t see some tangible proof of demand filtering down to higher profits soon, the share price could fall.

Overall, sentiment towards the US stock market’s positive for the year ahead. Investors do need to be careful and do their own research, but the professionals are clearly expecting a good 2025.

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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.

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The energy utility business has been on fire over the last 12 months, climbing by just shy of 290% versus Nvidia’s 240%. But unlike Nvidia, Vistra’s still trading at a cheap-looking valuation. In fact, even after almost quadrupling, the forward price-to-earnings (P/E) ratio sits at just 17.4.

Compared to the S&P 500’s current forward P/E of 22.7, that suggests Vistra shares still have some room to grow. So is this still a buying opportunity to consider right now? Let’s take a closer look.

Supplying critical utilities

Vistra Corp isn’t a household name here in the UK. But it’s a similar story across the pond. Between its 2016 IPO and 2023, the share price only climbed a mediocre 45%. That’s an annualised return of around 6.3%, vastly underperforming the S&P 500 over the same period.

However, earlier this year, Vistra caught a big break with the acquisition of Energy Harbor. While it cost $3.4bn, the deal gave Vistra 4,000 megawatts of nuclear energy capacity, enough to power roughly one million homes. And at the same time, the firm also became the second-largest energy storage enterprise in the country.

Demand for clean electricity’s skyrocketing thanks to large language AI models as well as electric vehicles. As a result, interest in nuclear energy solutions is rising fast both in the US and here in the UK. In other words, Vistra looks a potentially terrific way to invest in America’s energy transition away from fossil fuels.

How do the financials look?

Having the right infrastructure assets is obviously crucial, as are revenue and earnings. So how do Vistra’s fundamentals look?

On an underlying earnings basis, Vistra’s performance actually looks rather promising. Average revenue growth’s been fairly modest, given the group’s lack of pricing power. But from an adjusted EBITDA perspective, the company appears to be on track to deliver $6bn in profit by 2026 versus the $4.55bn-$5.1bn expected by the end of 2024.

Of course, the fundamentals aren’t perfect. Owning and operating energy infrastructure isn’t cheap and the balance sheet‘s been steadily accumulating debt over the last five years, with $16.8bn of outstanding loans reported in June. Higher interest rates with higher leverage aren’t a great combination, and the firm’s interest expense bill’s on the rise.

The good news is that management still has around $1.6bn in cash in the bank to tackle rising debt costs. But investors should keep an eye on cash flows to make sure debt isn’t getting out of hand while the group focuses on digesting its latest acquisition.

The bottom line

Vistra’s long-term potential looks promising, in my opinion. And its current valuation definitely looks attractive. However, since my portfolio already has sufficient exposure to the energy transition market, it’s not a business I’m rushing to buy today.

However, for investors looking to capitalise on this trend, this S&P 500 stock may be worth a closer look.

The post Up 288% in a year! Is the fastest-growing S&P 500 stock still a bargain? appeared first on The Motley Fool UK.

Calculating the numbers

If I’d invested £1,000 in a S&P 500 tracker fund this time last year, it would currently be worth £1,350.29. By contrast, my FTSE 100 tracker fund would be worth £1,080.61.

The difference £269.68. This is a lot, especially when I consider that it’s almost a 27% difference in the space of just one year!

The index performance is simply the sum of all the individual constituents within it. So when I look at the top-performing shares, I can see one factor that has caused the large divergence. For example, in the S&P 500, Vistra Corp (NYSE:VST) is up 322% over the last year. Nvidia isn’t far behind, with a whopping 206% gain.

When I look at the FTSE 100, the best performing stock is Rolls-Royce, up 152%. The second best is Marks and Spencer, up 72%. So there’s a clear difference in the size of gains from the stocks that help to lead the charge for each overall index.

A different mix

Another reason for the difference is due to the stocks that are included. The S&P 500 contains some of the largest and hottest stocks, particularly those related to artificial intelligence (AI). This has been one of the most profitable themes in 2024, with a significant number of investors jumping on the bandwagon.

Vistra Corp is a great example. It’s an integrated retail electricity and power generation company. The stock price has surged recently due to the expectation of higher demand from energy-hungry AI processes. More tech giants are looking to make use of nuclear energy as a lower-cost and more sustainable form of power.

So even though Vistra isn’t a conventional AI stock, the indirect benefit from the growth in this area should have a significant positive impact on the company. Of course, one risk here is that the financial payoff is likely some way off, as new plants need to be built and have contracts agreed. I’m not saying the share price is in a bubble, but investors are clearly excited (maybe a little too excited).

On the other hand, the FTSE 100 is weighted towards resources stocks — like miners and oil giants — and shares in financial services. Such sectors may or may not have had a bad year, but even on the plus side, there haven’t been the same kind of growth expectations in comparison to something like AI.

Looking ahead

Past performance doesn’t guarantee future returns. Some flag up that the US looks overvalued. For example, the average price-to-earnings ratio for the S&P 500 is 29.93. For the FTSE 100 it’s 14.47. So the S&P 500 is basically twice as expensive!

From that angle, I can make an argument for saying that if I had invested last year, I’d consider banking some profit and reinvesting that money in UK stocks now instead.

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Details to note

The company I’m referring to is Vistra Corp (NYSE:VST). It’s an integrated retail electricity and power generation company, noted as the largest competitive power generator in the US.

Vistra’s been around for several years, so some might wonder why the stock’s exploded 334% higher in the past year, particularly during 2024. The first boost came in late February, when it announced a strong set of results for the previous year. It reported net income of $1.49bn, a sharp turnaround from the loss of $1.21bn from the year before.

The business then benefitted from rising power prices. For example, natural gas prices have risen by 23% so far this year.

Yet the largest reason behind the move can be attributed to artificial intelligence (AI). This might seem odd for a utility provider. However, Vistra’s seen to be positioned to help provide nuclear capacity to power the energy-hungry AI processes. In fact, the share price jumped again last week following comments from the Alphabet CEO around how he’s looking to use electricity from nuclear plants to power its data centres.

Hold your horses

Simply put, AI’s potential market size is huge. The power needed to fuel the processes is even larger. So Vistra has a gold mine here on which to capitalise in coming years.

However, I do need to contain my excitement. The latest Q2 figures showed net income was broadly unchanged from the same quarter last year. The full financial benefit of AI won’t be felt for a while. In the report it noted that it had “started construction on two new solar facilities, a 200 MW site backed by Amazon in Texas and a 405 MW site backed by Microsoft in Illinois”.

These projects will take time to finish and come online. So there’s some risk that the share price could be in a bit of a bubble, with an investor frenzy pushing it higher before any clear benefit’s been enjoyed.

The bottom line

The Vistra performance has been incredible, but the rally has made the stock look a bit overvalued. The price-to-earnings ratio’s 107.9, well above the value of 10 I use for a fair value! Even for a growth stock it’s very high.

By comparison, other electric utility providers such as NRG Energy and and Exelon Corp have ratios under 20. This makes those stocks much more appealing to me.

Even though Vistra stock could keep soaring, I think I’ve missed the boat here. Therefore, I’d rather explore other stocks in the same sector that have a more reasonable value right now.

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