The Constellation Energy Corporation (NASDAQ: CEG) stock price went parabolic on Friday, reaching its highest point on record after inking a deal with Microsoft, the second-biggest company in the world.
CEG shares surged to a high of $254, bringing the year-to-date gains to 120%, making it one of the best-performing companies in Wall Street. It has also soared by over 500% from its lowest point in 2023, bringing its market cap to almost $80 billion.
The surge happened in a high-volume environment. Its Friday’s volume jumped to over 15 million, up from the average of 3.4 million.
Constellation Energy and Microsoft
The main reason why the Constellation Energy stock price surged is that the company inked a deal with Microsoft. Under the new plan, the company will restart unit one of the Three Mile Island nuclear power plant, the site of America’s worst disaster.
The plant, which is set to come back online by 2028, will provide power to Microsoft data centers, which are consuming substantial amounts of energy. As part of the reopening, the company will provide about 835 megawatts of carbon-free energy to Microsoft and other customers.
Nuclear energy is often seen as one of the best energy source globally because it does not emit carbon. It is also a better source than wind and solar, which produce energy only when the wind blows and the sun shines.
Microsoft and other large tech companies have been working on their data centers as computing demand rises because of artificial intelligence. Altogether, it is estimated that these firms will spend over $1 trillion in the next few years.
The challenge, however, is on whether the industry will achieve the return on this investment. While the AI industry is growing, it is unclear whether top companies are seeing a substantial benefit.
A good example of this is Microsoft, which is selling its copilot solution to companies. While some companies have signed up, many of them don’t believe that the cost is justified for the substantial cost.
Constellation has been growing
The deal with Microsoft came at a time when Constellation Energy’s business is doing well. Its annual revenue has jumped from over $18.9 billion in 2019 to over $24.5 billion. It has also become a highly profitable company as its annual profit in the last financial year stood at over $1.6 billion. Its trailing twelve month (TTM) revenue stood at over $2.39 billion.
The most recent quarterly results showed that its quarterly revenues rose from $5.4 billion in 2023 to over $5.47 billion. However, its quarterly profit retreated to $814 million from $833 million in the same period last year.
According to Yahoo Finance, analysts expect that Constellation’s revenue for the third quarter will come in at $6 billion, a 1.80% drop from the same quarter last year. For the final quarter, the estimate is that revenue will fall by 8.40% to $5.3 billion. As a result, the annual revenue is expected to drop by 6.2% to $23.39 billion.
Valuation and balance sheet
A key concern about the Constellation Energy stock price is that the company is a bit overvalued.
At a $80 billion valuation, the company has a P/E ratio of 36.42, much higher than the sector median of 18.6. Its forward non-GAAP P/E ratio is 32, also higher than the industry median of 18.
Constellation also trades at a forward EV-to-EBITDA ratio of 20, almost double that of other companies in the energy and utility industries. Its forward price-to-book ratio of 6.52 is higher than the industry median of 1.62.
This explains why the stock is trading at a higher price than estimates. The average estimate among Wall Street is $224, lower than the current $254.
Therefore, the company will need to boost its growth to justify this valuation. Besides, restarting the nuclear plant will take time and money. It will also need more permits to go on, a process that can take longer than expected.
According to SeekingAlpha, Constellation ended the last quarter with over $311 million in cash and equivalents and $1.6 billion in receivables. It also has $680 million in short-term debt and $7.4 billion in long-term debt.
Constellation Energy stock analysis
The daily chart shows that the Constellation Energy share price went parabolic after the Microsoft deal. As it surged, it moved above the key resistance point at $235.32, its previous highest point this year. It invalidated the double-top chart pattern when that happened.
The stock has remained above the 50-day and 100-day moving averages. Also, the two lines of the MACD and the histogram moved above the neutral level. The Relative Strength Index (RSI) has moved to the extremely overbought point of 82. Therefore, the stock will likely pull back and retest the support at $235.
The post Constellation Energy stock surged: brace for a pullback appeared first on Invezz
