Why NextEra energy dropped today

Shares of a Florida energy giant and renewable energy developer The energy of the next era (FROM HOME -5.50%) fell 5.5% on Tuesday.

Although the utilities sector is supposed to be a stable and somewhat “boring” sector, it was anything but that last year. In NextEra’s case, the company’s stock lost ground last year as long-term interest rates rose, but rebounded in early 2024 as the hypergrowth of artificial intelligence (AI) data centers raised hopes of excessive growth in electricity demand.

However, at today’s Investor Day event, NextEra’s mid-term guidance through 2027 may have disappointed those who were hoping for more headwinds in AI development.

Only 6% to 8% growth for several years

In today’s presentation, NextEra provided multi-year earnings per share (EPS) guidance through 2027:

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

Although the guidelines for the next few years mean an acceleration in the growth rate compared to 2024, they were clearly not enough to satisfy investors’ hopes. Over the past 10 years, NextEra’s adjusted (non-GAAP) EPS growth has averaged 9.8%. So this forecast means some slowdown.

NextEra shares are up about 30% in 2024, largely based on the narrative that AI-powered data centers, the shift of manufacturing to the U.S. and the electrification of transportation will require a big, step-change in electricity demand in the future.

NextEra actually confirmed the expected increase in demand, forecasting a 38% increase in U.S. electricity demand from 2020 to 2040. This may not sound like much over 20 years, but it is actually a huge step compared to the mere 9% increase in demand between 2000 and 2020.

But building all this new energy will also be expensive, especially since higher interest rates make such expansion less affordable and therefore limit the ability to increase profits. NextEra forecasts it will spend a total of $53 billion to $59 billion in net capital expenditures over the next four years. That averages out to about $14 billion a year, up from $9.3 billion last year.

NextEra is best in class, but not exactly cheap

NextEra has become known as a great electric utility operator in Florida, a state with a lot of growth. Additionally, it has been recognized by investors for its leadership in renewable energy development throughout the United States

However, with a share price of $76.97 to start the day, NextEra shares were still trading at 18.8 times its 2027 EPS forecast at the midpoint. Given that interest rates are higher now than in the past, this multiple may have been a bit too high for investors with higher growth expectations.