The stock has rallied but its story is still in the early innings.
Artificial intelligence stocks have reached dizzying levels this year, and some investors are suddenly finding they have a fear of heights. Nothing could be more grounded than Quanta Services.
Tech stocks led the midweek selloff, with the Nasdaq Composite falling 2% on Wednesday, just a few days after it suffered its worst one-day point decline on record on June 5. It’s not surprising that these highfliers would take the brunt of the pain, given how quickly they’ve risen and with old worries like geopolitics and inflation reminding the market that the real world isn’t as cut and dry as a ChatGPT jaw session.
“After a powerful rally, especially in AI-related and growth stocks, investors are reassessing how much they’re willing to pay for future earnings in an environment where interest rates could remain higher for longer,” notes David Miller, chief investment officer at Catalyst Funds.
Quanta Services was caught up in the AI tumult, and that wasn’t a surprise either. The industrial services provider, which counts utilities and oil-and-gas companies among its clients, has benefited from AI’s insatiable energy appetite: The shares are up some 50% since Barron’s recommended them in the fall. It’s not done yet.
READ MORE TRADER
Big tech companies are planning to pour trillions of dollars into AI development in the coming years–commitments that are unlikely to be undone by a few pullbacks–and electricity demand will rise along with the number of data centers. Therefore, more power plants will have to be kept running, which helps explain Quanta’s record $48.5 billion backlog.
Quanta is the partner of choice for many utilities because it has both the equipment and the labor to deliver on its promises. Management estimates that it has “more journeymen electricians than any other contractor in the country, the product of over 30 years of deliberate workforce investment exceeding $100 million annually,” as JPMorgan Mark Strouse put it in a note this week.
Likewise, increased AI demand means the potential expansion of ultrahigh voltage, or UHV, transmission lines, which are widely used in other nations like China. That could mean even more business for Quanta. “The company’s Electric Power Infrastructure Solutions segment performs a lot of the actual line construction on UHV projects, and Quanta has consistently alluded to transmission as one of the highest-growth items in its backlog,” writes Evercore ISI analyst Nicholas Amicucci.
Quanta isn’t just an AI play and even Luddites can like the stock. From burying power lines to building out biofuel plants and other renewable energy projects, the company has plenty of business tied to non-tech infrastructure as well.
Quanta trades around 42 times next year’s earnings, but if that seems too rich it’s worth noting it’s below its five-year average. Earnings per share are expected to more than double from 2023 to 2026, with consensus calling for EPS to jump 26% year over year to $14 this year and climb another 17% next year. Gross margins have been marching higher too, and last month the company’s board authorized a new $1 billion share repurchase plan.
That’s a powerful combination.
Write to Teresa.Rivas@Barrons.com