Energy for AI: Morgan Stanley Has Picked Two Stocks with Growth Potential of Nearly 150%

Morgan Stanley recommended that investors consider shares of two small companies involved in geothermal energy—Ormat Technologies and Fervo Energy, according to MarketWatch. Analysts explain that demand for electricity, which has surged due to the artificial intelligence boom, is driving the development of renewable energy sources and making them more attractive to investors.

They believe that “geothermal energy is in the early stages of its own ‘shale revolution.’” The conditions for this are being created by demand for electricity and rapid advances in geothermal technology. In particular, EGS, which allows for the use of geothermal heat in locations where it is uneconomical to build conventional geothermal power plants, according to the investment bank’s report.

Shares of Ormat Technologies and Fervo Energy fell amid a broad sell-off of energy stocks and artificial intelligence-related companies, but Morgan Stanley believes this has made their valuations “more attractive.”

Here are the arguments put forward by Morgan Stanley.

Ormat Technologies, with a market capitalization of nearly $5.8 billion on the New York Stock Exchange, “offers clear growth prospects in the traditional geothermal energy sector through 2030, while EGS will provide long-term potential,” according to Morgan Stanley. The investment bank draws investors’ attention to the scale of the company’s operations, its in-house equipment manufacturing capabilities, as well as promising sites for new power plants and opportunities for connecting to power grids.

At the end of the second quarter, Ormat's revenue rose 10.6% year-over-year to $258.8 million, while net income for the same period fell 3.4% to $27.1 million.

"A stable core cash flow and a proven track record of success make these shares a less risky way to invest in the development of geothermal energy," according to a Morgan Stanley report. The investment bank set a price target of $123 for the company’s shares, representing a 30.6% upside from the last closing price ($94.19).

Ormat shares have a total of eight “buy” ratings from Wall Street analysts and six “hold” ratings. The average price target is $122, which is 29.5% higher than the stock’s closing price on November 3.

Fervo, with a market capitalization of $2.75 billion on the Nasdaq, specializes exclusively in EGS. Using technologies traditional to the oil and gas industry—horizontal drilling and distributed fiber-optic sensing—it can generate geothermal energy in areas that were previously considered uneconomical. Traditionally, geothermal power plants were built only where there is hot rock, groundwater, and rock fractures.

Among the company's strengths, Morgan Stanley cites its "clear strategy for cost reduction and growth." The investment bank notes that Tim Latimer, co-founder and CEO of Fervo, previously worked as a drilling engineer at BHP Billiton.

Morgan Stanley has set a price target of $23 for Fervo shares—nearly 147% above the latest closing price ($9.32). For Fervo, the key factor will be the company’s ability to deliver projects on time and within budget, and Wall Street will be closely monitoring the company’s operational progress in the coming quarters, the investment bank notes.

Since its IPO in May, Fervo’s stock has fallen by approximately 65%. Pressure on the stock intensified following an October report by short-seller Morpheus Research, which accused the company of concealing technical problems and rising costs. Fervo called these conclusions a biased interpretation of early data from a pilot project.

All 14 analysts covering the company unanimously recommend buying its stock. The average price target is $32.77, which is nearly 252% higher than the stock's price on November 3.