DeepSeek Raises Doubts About Energy Demand Growth Upside

The release of Chinese AI company DeepSeek’s open-source reasoning model R1 has raised questions about how much electricity will be required to power future data centers. We still believe data center growth will result in more electricity demand, but not as much as market valuations suggested.

Why it matters: Stocks for Vistra VST, NRG Energy NRG, and other power producers were down on Jan. 27, based on speculation that open-source reasoning models will result in less energy demand growth.

• R1 illustrates the threat that computing efficiency gains pose to power generators. If higher data usage requires less energy than previously expected, it could have big ramifications for demand.
• Lower costs for large language models could increase demand for AI inference. In the near term, we expect Microsoft MSFT, Amazon AMZN, Alphabet GOOGL/GOOG, and others to continue investing in data center expansion.

The bottom line: We still believe data centers, reshoring, and the electrification theme will remain a tailwind, but that market expectations went too far. We reaffirm our fair value estimates and High Uncertainty Ratings for Vistra and NRG.

• Vistra’s stock price is more than double our $52 fair value estimate after its 28% drop on Jan. 27. It has the most sensitivity to long-term power prices.
• NRG’s stock price is more than double our $43 fair value estimate after a 13% drop on Jan. 27. NRG’s retail-focused business model limits its upside to higher electricity demand.

Big picture: We expect Vistra and NRG to make large share buybacks, but the runup in their stock prices makes those buybacks less value-accretive.

• For Vistra, we estimate $5.9 billion adjusted EBITDA in 2025, in line with management’s $5.5 billion-$6.1 billion guidance. We expect minimal growth through 2027.
• For NRG, we estimate 2025 adjusted EBITDA near $3.7 billion, the low end of management’s $3.7 billion-$4.0 billion guidance.