Why NextEra Energy Sunk Today

Shares of the Florida utility giant and renewable power developer. NextEra Energy (nee -5.50%) It fell 5.5% on Tuesday.

The utilities sector is considered a stable and somewhat “boring” sector, but that hasn’t been the case at all over the past year. In the case of Next Era, its stock price plummeted last year as long-term interest rates rose, but it showed signs of recovery in early 2024 as expectations for a surge in electricity demand were sparked by the rapid growth of artificial intelligence (AI) data centers.

But NextEra’s medium-term guidance out to 2027 at its Investor Day event today may have underwhelmed those hoping for a bigger AI tailwind.

Growth has been limited to 6-8% for several years.

In today’s presentation, NextEra laid out multi-year earnings per share (EPS) guidance through 2027.

Data source: NextEra Energy press release 6/11/24.

Guidance for the next few years indicates an acceleration in growth rates for 2024, but this does not appear to be enough to meet investor expectations. Over the past 10 years, NextEra’s adjusted (non-GAAP) EPS growth has averaged 9.8%. Therefore, this forecast indicates a slight slowdown.

NextEra’s stock has recovered about 30% in 2024, largely driven by explanations that AI data centers, the onshoring of U.S. manufacturing, and the electrification of transportation will require major changes in electricity demand.

NextEra actually confirms demand growth projections, predicting that U.S. electricity demand will increase 38% between 2020 and 2040. This may not sound like much in 20 years, but it’s actually a huge improvement from just 9%. Demand growth from 2000 to 2020.

But building all that new power will be expensive. This is especially true because higher interest rates make it cheaper to build power, limiting the ability to increase revenue. NextEra expects cumulative spending on a net basis for capital expenditures to range from $53 billion to $59 billion over the next four years. This averages out to about $14 billion per year, up from $9.3 billion last year.

NextEra is best in class, but it’s not exactly cheap.

NextEra is known as a great electric utility operator in Florida, where it’s experiencing a lot of growth. The company has also received praise from investors for its leadership in renewable energy development across the United States.

But at $76.97 to start the day, NextEra’s stock was still trading at 18.8 times forecast 2027 EPS at the midpoint. Because interest rates are higher now than they have been in the past, that multiple may have been too high for investors with larger growth expectations.