Artificial intelligence (AI) could be one of the largest investment opportunities in history. Consequently, many investors have become familiar with Nvidia(NASDAQ: NVDA), the semiconductor company whose chips power the most advanced AI systems.
Nvidia is the second best-performing member of the S&P 500(SNPINDEX: ^GSPC) year to date, with its share price increasing 200% amid unprecedented demand for its hardware. But AI stocks come in all shapes and sizes.
For instance, utilities company Vistra(NYSE: VST) has led the S&P 500 higher this year, with its share price increasing 228%. While not a traditional AI stock, investors think Vistra could be a major winner as the AI boom increases data center energy requirements.
Here are the important details.
Nvidia: 200% return year to date
Investors may worry they missed a golden opportunity to buy Nvidia stock earlier this year, before it tripled in value. However, while I doubt shares will perform as well over the next year, the stock is still a worthwhile investment. Grand View Research estimates spending on artificial intelligence (AI) accelerators will compound at 29% annually through 2030, and Nvidia is ideally positioned to benefit.
Of course, many chipmakers hope to cash in on the AI boom, and hyperscale cloud companies like Alphabet and Meta Platforms have started designing custom AI silicon. But competing with Nvidia is incredibly difficult. Its graphics processing units (GPUs) are the gold standard in accelerating AI workloads not only because they are faster than rival chips, but also because they are backed by a more extensive ecosystem of software development tools. Nvidia has been building that ecosystem, called CUDA, for the better part of two decades.
Consequently, the Nvidia brand is synonymous with AI accelerators. The company accounted for 98% of data center GPU shipments over the last two years, and it currently accounts for about 80% of AI chip sales. Nvidia has reinforced its leadership by adding server central processing units and networking gear to its portfolio. That strategy lets the company design data center systems with the lowest total cost of ownership, according to CEO Jensen Huang.
In summary, Nvidia is well positioned to protect its leadership position in the AI accelerator market because it pairs superior chips with robust software development tools, and its systems theoretically offer industry-leading return on investment. In turn, Wall Street expects the company's earnings to increase at 38% annually over the next three years. That makes the present valuation of 67 times earnings look tolerable.
In fact, those figures give a PEG ratio of 1.7, which is well below the three-year average of 3.1. That does not mean Nvidia stock is cheap today, but it does mean long-term investors should feel comfortable buying a small position at the current price.
Vistra: 228% return year to date
Vistra is a utilities company that integrates (1) power generation across gas, coal, nuclear, and renewable energy facilities with (2) retail electricity sales to residential, commercial, and industrial customers. With an installed capacity of 41 Gigawatts (GW), it is the largest power generator in the United States. It is also the largest residential retail electricity provider in the country.
Vistra has several important catalysts on the horizon. First, electrification of the Permian Basin driven by population growth in West Texas is expected to add 20 GW of demand by 2030. Second, the artificial intelligence infrastructure buildout in data centers is expected to add 35 GW of demand during the same period. Third, management expects additional demand arising from the reshoring of industrial activity.
Vistra reported second-quarter results that missed estimates on the top and bottom lines. Revenue increased 21% to $3.8 billion, but Wall Street expected $4 billion. Likewise, GAAP earnings declined 23% to $0.90 per diluted share, but analysts expected $1.38 per diluted share. On the bright side, management reiterated adjusted EBITDA guidance for 2024 and raised its full-year outlook for 2025. Vistra also announced power purchase agreements with Amazon and Microsoft.
Investors are hoping nuclear deals follow, like the recent agreement between Microsoft and Constellation Energy. Many experts see nuclear energy as a good way to address growing demand from data centers because it is virtually carbon-free and more reliable than solar and wind energy. Importantly, Vistra has the second-largest nuclear power fleet in the U.S., which could position the company as a long-term winner as the AI boom unfolds.
Wall Street expects Vistra's earnings to increase at 78% annually through 2027, reflecting in part the company's plan to repurchase more than $3 billion in stock through 2026. Overall, that estimate makes the current valuation of 96 times earnings look reasonable. Indeed, among the 15 analysts that follow Vistra, 93% rate the stock a buy and the median price target of $137.50 per share implies 10% upside from its current share price of $125.
Having said that, Wall Street has been relatively inconsistent where Vistra is concerned. In fact, analysts have overestimated earnings for four consecutive quarters, and the average estimate was 400% too high. So, investors should view future projections skeptically, and it may be prudent to wait for more proof that Vistra will be a major winner from the AI boom.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Constellation Energy, Meta Platforms, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
