With the explosion of AI technology and the tremendous energy it demands, business leaders have been frantically searching for new ways to power this technological super-trend. Just for context, if the rate of adoption for AI continues at its current pace, data center energy demand will grow from 3-4% of total power demand to 11-12% by 2030, according to McKinsey. That is a massive increase and if the US is going to keep up, we need to find a solution fast.
In a surprising turn of sentiment, business leaders and policymakers have turned to nuclear energy as a potential solution. Microsoft (MSFT) just recently struck a deal to restart operations at Three-Mile Island, a once shuttered nuclear power plant.
While I am very excited by the resurgence of favorable opinion towards nuclear energy and the attempts to add it back to the energy grid, there is still one major problem. To power the expansion of AI, new power needs to be added to the energy grid immediately, and while nuclear energy has incredible potential, it will be years before the requisite infrastructure gets online to truly expand nuclear capacity. The reality is, there are very few existing nuclear power plants and erecting them takes years.
Fortunately, there is a solution. One energy source that is readily available today, with a well-established infrastructure already in place, is natural gas. I think it is more than likely that natural gas will end up being the primary solution for powering AI, as it is already the leading source of electricity, producing 43% of the country’s electricity.
At this moment in time, we are ahead of the market in realizing just how important natural gas will be for Artificial Intelligence, and it may soon become a major investment theme. Archrock (AROC) and Targa Resources (TRGP) are two stocks with top ranks and strong price momentum that should benefit tremendously from this trend.
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Archrock: Fair Valuation and Stock Price Momentum
Archrock is a natural gas compression services company based in the U.S. It focuses on providing natural gas compression equipment, maintenance, and operational support. This service is crucial for the transportation of natural gas through pipelines, as compression is necessary to maintain adequate pressure for efficient transmission over long distances.
Archrock’s customers include natural gas producers, processors, and transportation companies. The company’s core market benefits from the growing demand for natural gas as a cleaner energy source, especially as the shift toward providing for the AI revolution progresses. The company’s significant presence in the U.S. natural gas industry positions it to capitalize on the ongoing expansion of infrastructure and increasing reliance on natural gas.
In addition to a Zacks Rank #1 (Strong Buy) rating, reflecting upward trending earnings revisions, Archrock also boasts a compelling technical chart setup. The stock has gone on a strong run since the start of 2023 but has been consolidating since the end of Q1 this year. Now, the price action is bumping up against the upper level of resistance and with the new catalyst of AI, I wouldn’t be surprised to see a breakout very soon.
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Archrock is also currently trading at a reasonable valuation. At 19.8x forward earnings, it is below the market average and its 10-year median of 23.1x. Archrock also pays a tidy 3.1% dividend and has raised the payout by an average of 4.4% annually over the last three years.
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Targa Resources: Industry Leading Stock
Targa Resources is a leading provider of midstream services in the North American energy sector. The company primarily focuses on the gathering, processing, storage, and transportation of natural gas and natural gas liquids (NGLs). Targa operates an extensive network of infrastructure, including pipelines, storage facilities, and gas processing plants, which support the efficient movement of natural gas and NGLs from production points to key markets.
Targa Resources is known for its strategic position in key energy-producing regions, such as the Permian Basin and Eagle Ford Shale, enabling it to benefit from rising U.S. energy production. The company plays a crucial role in ensuring the supply chain for natural gas and NGLs remain efficient, supporting the broader energy market. Targa’s financial stability, ongoing infrastructure development, and integrated services make it a prominent player in the energy midstream industry.
Targa Resources enjoys a Zacks Rank #1 (Strong Buy) rating led by analysts unanimously upgrading earnings estimates. FY24 earnings estimates have increased by 4.1% in the last two months and are expected to grow 61.2% year-over-year (YoY), while FY25 estimates have jumped by 5.4% and are projected to climb 25.2% YoY.
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TRGP is currently trading at a one year forward earnings multiple of 27.7x, which is just above the market average, but below its 10-year median of 28.3x. Targa Resources also has a dividend yield of 1.8% and has raised the payment by an average of 31% annually over the last five years.
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Should Investors Buy AROC and TRGP Shares?
Both Archrock and Targa Resources present compelling opportunities for investors seeking exposure to the natural gas industry, particularly as this energy source gains renewed importance in the age of AI and increased energy demand.
Both stocks are well-positioned to benefit from the next commodity megatrend driven by the AI revolution’s energy demands. Archrock provides a more value-oriented play with steady income, while Targa Resources offers a growth narrative backed by its pivotal role in the midstream natural gas sector. Investors looking to ride the wave of increased natural gas usage may find both stocks appealing, depending on their investment style and objectives.
Zacks’ Research Chief Names “Stock Most Likely to Double”
Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.
This top pick is among the most innovative financial firms. With a fast-growing customer base (already 50+ million) and a diverse set of cutting edge solutions, this stock is poised for big gains. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners Up
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Targa Resources, Inc. (TRGP) : Free Stock Analysis Report
Archrock, Inc. (AROC) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.