Morgan Stanley backs geothermal stocks Ormat and Fervo amid rising AI power demand

Morgan Stanley has issued a vote of confidence in two smaller geothermal power companies, Ormat Technologies and Fervo Energy, MarketWatch reported. The AI boom has driven a surge in electricity demand, spurring renewable energy development and making the sector more attractive to investors, Morgan Stanley said.

“Geothermal is in the early innings of its own ‘shale revolution,’” its analysts wrote. Rising electricity demand and rapid advances in geothermal technology are setting the stage for that shift, the bank said. In particular, enhanced geothermal systems, or EGS, make it possible to tap underground heat in areas where conventional geothermal plants would be uneconomical.

Ormat Technologies and Fervo Energy fell in a broader selloff in power and AI stocks, but Morgan Stanley says the pullback made their valuations “more compelling.” Here is Morgan Stanley’s case for each stock.

Ormat Technologies, which is listed on the New York Stock Exchange and has a market capitalization of around $5.8 billion, offers “visible conventional geothermal growth through 2030, with EGS providing longer-term upside,” Morgan Stanley said. The bank fingered the scale of Ormat’s operations, its ability to manufacture equipment in-house, and its promising sites for new plants and access to the power grid.

Ormat’s second-quarter revenue rose 10.6% year over year to $258.8 million, while net income attributable to shareholders fell 3.4% to $27.1 million. “Stable base cash flow and established track record make the stock a lower-risk way to play geothermal growth,” Morgan Stanley argues. It set a target price of $123 per share, implying 30.6% upside from the last close of $94.19 per share.

Ormat has eight bullish calls from Wall Street analysts versus six “hold” ratings. The consensus target price of $122 per share is 29.5% above Tuesday’s close.

Fervo, which is listed on the Nasdaq and has a market capitalization of $2.75 billion, focuses exclusively on enhanced geothermal systems. Using techniques common in the oil and gas industry, including horizontal drilling and distributed fiber-optic sensing, Fervo can generate geothermal power in areas previously considered uneconomical. Conventional geothermal plants have been built only in places with hot rock, groundwater, and naturally occurring fractures in the rock.

Morgan Stanley cited Fervo’s “visible cost-reduction and growth road map” as one of its strengths. The bank notes that Fervo cofounder and CEO Tim Latimer previously worked as a drilling engineer at BHP Billiton. It set a target price of $23 per share for Fervo, implying around 147% upside from the last close of $9.32 per share. Fervo’s ability to deliver projects on time and within budget will be critical, the bank said, adding that Wall Street will closely watch its operational progress in the coming quarters.

Fervo shares are off around 65% since the company’s IPO in May. An October report from short seller Morpheus Research added to the pressure, accusing Fervo of concealing technical problems and rising costs. Fervo said the report offered a selective, outcome-driven reading of early pilot data.

All 14 analysts covering Fervo have bullish calls on the stock. The consensus target price of $32.77 per share is around 252% above Tuesday’s close.