Morgan Stanley sees renewable stock rallying 50% on data center demand from tech industry

AES Corp . is positioned to lead the renewable energy buildout to support demand from data centers, with the company viewed as a key partner to tech companies scaling up artificial intelligence, according to Morgan Stanley. “AES remains well positioned to serve data center renewables demand, where it still sees robust interest and upward pressure to returns,” David Arcaro and a team of analysts told clients in a Friday note. Arcaro has a stock price target of $25 for AES, which implies nearly 50% upside from Thursday’s close of $16.94 per share. AES is viewed as a key partner for the tech sector because the company executes on time and budget, having never canceled a project, the analyst wrote. It has a renewable pipeline of 66 gigawatts, the majority in the U.S., with 75% located in data center growth areas. The case remains strong that load growth from data centers will be met in large part from renewables and batteries, though gas-fired generation will also be needed, Arcaro said. AES has found that tech customers prefer energy sources that do not emit carbon dioxide emissions. “The company has no shortage of customer interest in renewables,” he said. AES also has a strong relationship with suppliers, Arcaro said. The company has all the needed equipment on site for 2024, most of 2025 and part of 2026, he added. What’s more, AES doesn’t have much risk exposure to the outcome of the U.S. presidential election in November. While a repeal of the Inflation Reduction Act is unlikely, even if the law were overturned, AES could pass higher costs to customers through higher power agreement prices, leaving returns largely unchanged, the analyst said. “Demand should also be protected to some degree given the substantial AI demand and decarbonization commitments in this industry, making this customer base relatively less price sensitive,” Arcaro said.