Is VST Stock Worth Buying? - Here's What You Need to Know

In today's video, we are going to be talking about VST, which is Vistra Energy. This stock has quickly become one of the most requested stocks for me to talk about on my channel, and I have been seeing this ticker pop up all over social media, seemingly out of nowhere. So, I spent the weekend going through the business, its investor material, and really trying to understand what it does, what its mot is, and what the bull and bear arguments are towards this stock. And in today's video, I want to share everything that I found with you so you can better understand if this stock is truly looking interesting or if it's just being overhyped. All I ask is that you please leave a like on the video and consider subscribing to my channel if you want to see more stock market related content like this. But with that being said, let's now dive into the video. And let me start off by showing you that VST stock is up roughly 800% since its IPO back in 2016. However, the stock is currently in a roughly 31% correction. Now, what's interesting is the CEO and a couple of very well-known investors are using this correction to buy shares of the business. The CEO has recently purchased $1.3 million worth of shares in this price range in the open market. Peter Teal has made VST roughly 14% of his macro funds portfolio and David Ter has made it 4.7% of his funds portfolio as well. So again, the CEO and some very well-known investors are buying into the stock right now. And I think that this could be partly why it is blowing up on social media and why seemingly out of nowhere, I am being asked about this stock every single day, it seems. So now let's dive in to my Daniel Pron slideshow that I have put together on all of my research on this business. All right, so let's start off by discussing what Vistra Energy actually does. VST is an independent power producer or an IP. It's a merchant generator with a competitive retail business. What this means is that Vistra sells electricity or power into wholesale markets at prices that are set by realtime supply and demand. When the grid tightens and demand is high, electricity prices spike and Vistra makes more money. But when supply is loose and there is not as much demand, then its profits are also lower. This means Vistra is more cyclical than your typical regulated utilities business. But it also benefits more from tighter electricity markets when demand is high. And that is basically the bull thesis of the business right now. Vista serves approximately 5 million residential, commercial, and industrial customers. It is one of the largest competitive power generators in the United States. It has roughly 44,000 megawatts of generation across its diverse portfolio of assets. And within that portfolio, it has the second largest nuclear fleet in the United States. 56% of its production comes from natural gas, 19% from coal, 24% from nuclear, and less than 1% is from renewables. So, Vistra is a pretty well diversified independent power producer in the United States. So, now let's talk about the bull thesis. And my first point here says that data center demand is causing electricity demand to also accelerate across the United States. The US is estimated to consume about 50% more electricity by 2050. Electricity demand across the US is already increasing significantly as well after two decades of flat growth. US electricity generation is at a record high and is up 2.8% 8% year-over-year, which is actually a lot of growth for electricity demand across an entire nation. Data centers, manufacturing, and electrification are all driving electricity demand higher. Electricity is also becoming the primary bottleneck for artificial intelligence development, which is causing electricity providers to see tremendous demand from the hyperscalers. In fact, Vistra has recently signed 20-year power purchase agreements with both Meta and Amazon. So Meta and Amazon are securing long-term power agreements with Vistra, which should provide stable and growing cash flows for the business over the coming decades. The rising demand for energy is also straining the grid and causing electricity prices to spike. They are up 36% since 2022 across the United States and Vistra directly benefits from this. So the summary here is that there are multiple tailwinds driving electricity demand and prices higher in the US which directly benefits IPS and will cause them to see stronger growth and Vistra is. This next slide comes from Vistra's Q1 investor presentation and here they show the two power markets that they operate in and sell into. These are the PGM and Urkot markets and both are seeing record demand. When you combine these two markets, then they have been growing by about 3% annually since 2022, which again is pretty strong for an energy market. Vistra is also expecting about 4% annual growth to its main markets over the next few years as well. And this is a good indicator of future organic growth since it means that there will be more power demand for Vistra to sell into. So now let's talk about Vistra's guidance and growth. Well, in their second quarter that was recently announced, Vistra reaffirmed its guidance with management saying that it will be at or above the midpoint of 7.4 billion of IBITA and $4.3 billion of free cash flow before growth investments. However, guidance for 2027 was set at 7.4 to 7.8 8 billion of IBITA, but management said that they are currently tracking at the lower end, which means that 2027 is expected to be a year of very little to flat growth for the business. This next point is very important to understand though because Vistra's guidance does not include the recently announced Coentrix acquisition and the Meta Power Purchase agreement, which they peg at roughly $700 million of additional IBIDA combined. So altogether if these two close then 2027 could end up producing about $ 8.1 billion in IBITA which would work out to growth of roughly 8% over the next year. VST also shared that it has a 60% conversion from IBITA to free cash flow before growth investments which means that Vistra is expecting roughly $5 billion of free cash flow for next year. Now on top of this VST aggressively buys back shares. So free cash flow per share actually compounds faster than the net free cash flow metric. VST has also shared that it is expecting to produce 10 billion of cash to deploy into growth and return to shareholders in 2026 and 2027. It is expecting more organic growth in 2028 because its power pricing isn't locked in fully for that year, which means it can benefit more from higher electricity prices if electricity demand remains strong out to 2028. And that is really when the business is projecting to see stronger organic growth. But for 2027, it is expecting 0 to 2% organic growth currently. So now let's talk about the valuation of the business. So from the top, VST is expecting $4.3 billion in free cash flow before growth this year and about 5 billion next year for 2027. The company is currently valued at just over $50 billion in the stock market today, which puts it at 11.6 times this year's free cash flow before growth and 10 times next year's. Now, after researching the business all weekend, I estimate that it can probably grow between 0 to 7% per year organically, 0 to 5% annually from acquisitions, and 1 to 5% per year from buybacks. All of this works out to roughly 1 to 15% annual growth on a per share basis. Now, the reason that I am not putting 1 to 17% annual growth is because the buybacks and acquisitions come from the same capital. If there are no acquisitions, then buybacks will ramp up. But if there are acquisitions, then buybacks will slow down. But if there are acquisitions, then the company's buybacks will slow down. In fact, in the most recent year, buybacks have slowed down to under 2% because they have been buying more businesses and doing larger acquisitions. So, you can clearly see that acquisitions and buybacks come from the same capital and kind of feed into each other. I also believe that growth will be quite volatile and it will not be a 10 to 15% annual growth rate every single year because historically this business has been very volatile and again on an organic basis next year is expected to actually be flat to only 2% year-over-year growth. And let me show you what I mean here. So the chart you're looking at on your screen is Vistra's IBITa since their IPO in 2016. And you can see that its historical IBIDA has been very volatile and even went negative in 2020. You can also see that the trend is clearly up. But this company's IBIDA growth is anything but consistent. This is the exact same story for the company's operating cash flows. And when it IPOed in 2016, it actually had negative operating cash flows. Then operating cash flow grew to 3.3 billion in 2019, then went negative from 2020 to 2021, and then spiked up massively in 2023, and now it's been roughly 5.1 billion. But you can see that the historical operating cash flow for the business has also been very volatile. Now, lastly, if we take a look at their GAP earnings, you can see that this has been the most volatile by far. It was negative in 2017, then positive, then negative from 2020 to 2022, then positive, and it's just been bouncing around all over the place. So here you can clearly see that the company's IPA, operating cash flow, and earnings have all been cyclical for about the past decade now. However, I do want to make it clear again that even though the earnings and cash flows have been cyclical, they are clearly trending up and growing. However, this leads me to believe that Vista's business is more cyclical just by nature. And I think that's just the nature of IPs. And I think that going forward over the longer term, VST's business will prove to be cyclical at some point again. So now let me run you through my quick DCF on VST here. So in my DCF, I have them growing IBITA by about 7% annually over the next 5 years, trading for an eight price to IBITA multiple and buying back 4% of their shares on an annual basis. And in this DCF with these metrics, I get a 12.65% 65% compounded annual growth rate, a fair value of $168 bucks, and a future share price of $265, which means the stock could produce a 78% total return over the next 5 years, which isn't bad at all, by the way. And I think that this is a more realistic DCF for this business. Again, because the organic growth for the business really isn't that high, and it does grow through acquisitions and buying back shares. So a 7% annual growth rate to ibitta would be about 3% organic growth per year topped up with about 4% acquisitive growth per year as well and then again buying back 4% of the shares. I think that this is very realistic for the company. This is not a high growth business. This is a utility company that really just grows through electricity markets growing power increasing in price and also topping that up with some acquisitions. Now if we also take a quick look at VST's historical IBIDA once again you can see just how volatile it has been historically. So pricing in 7% annualized growth I think could be realistic you know just looking at the terminal value but over this time I think that we will see dips along the way just like we have seen historically as well. Now in regards to the 8 price to Ebbit multiple if we change to our price to IBATA chart right here we can see that Vistra's historical median has been about 6.45 45 since it IPOed and again I am actually using an 8 price to IBA multiple which is slightly above where the stock is currently trading. So I am also pricing in some multiple expansion from here because I do think that the historical median of 6.45 is a little bit too pessimistic because it includes periods like in 2023 where Vistra was selling for about 2.67 times IBITA which I think is way too low for this business. So I do think that an eight price to ibeta multiple is more fair for this business. And if you think about it, if 60% of IBIDA converts into free cash flow before growth, then that is actually a 13.3% price to free cash flow using their free cash flow before growth investments. And I think that a 13.3 price to free cash flow before growth investments for a very cyclical utilities business is pretty dang fair in all honesty, especially one that historically has not grown that quickly and I don't think we'll grow that quickly in the future either. So ultimately, I do not think that it's offering a ton of value for a more cyclical power producer. So then I think the question investors would ask me is how can future returns be so low compared to the stock's historical returns? Well, I think it's very important to understand where the historical returns for VST actually came from. And this next chart shows you where the historical returns for the stock has come from and it's mostly come from multiple expansion. As we saw earlier in the DCF, Vistra was trading for about 2.3 times IBIDA back in 2023. And as we can see today the stock is trading for about 7.4 times IBITA. So its price to IBIT multiple has roughly tripled over the past about 3 years. And down here you can see the price to IBITA has compounded by 47.5%. Whereas the total share price has compounded by 70.7%. So well over half of the share price returns have come from the price to ibeta expanding or from multiple expansion. And I do not think investors should be expecting the multiple to continue expanding at this rate or even really expect the multiple to expand much more from here. In other words, I do not believe the future returns of VST will look like its historical returns because the main engine of those returns again which is multiple expansion has largely been depleted now. So, my concluding thoughts on VST are I think it's a good business that benefits from increasing energy demand. It's also nice to see that the CEO and some well-known investors are buying shares of the business. However, I do not think it's going to produce tremendous returns from here, and it's probably a little below fair value today, if I had to guess. I don't think a cyclical energy producer can sustain high multiples, but the market could really like it if the growth does end up being higher for the foreseeable future due to a tighter electricity market. I also think that it's very important to understand that the vast majority of its returns have come from multiple expansion and as I said, I believe that engine has been gassed out. future returns will more closely follow the actual fundamental growth of the business which I think can be anywhere between 0 to 15% on an annual basis depending on what energy prices do. So to me it looks like a slower growth more cyclical business trading for a low price. So for me it's not a buy in my portfolio. I just think that there is more attractive stuff out there in the market today like Meta. I think Meta is offering a lot more value and could produce significantly more returns over the long term from its current price. And when I compare Vistra versus Meta, at least in my own portfolio, I think that Meta just fits in a lot better. So, no, I'm not going to be buying Vistra. I understand that it looks extremely cheap in the market right now, but it's not one that I think I'm going to add to my portfolio. So, with that being said, that is going to wrap up today's video. And I do quickly have one last thing that I want to say, and that's that I'm going to be posting a Hamilton ETFs sponsored video in the near future. And I just want to give you a quick heads up and ask that you please consider watching the video and giving it a try regardless because Hamilton has been a very consistent sponsor of my channel and they have been a huge supporter of my content and my channel as well. I know that it is a sponsored video, but I do think that Hamilton is one of the best ETF providers in the entire market and their products are genuinely cool and that is why I choose to accept sponsorships on my channel. But I do just want to give you that quick little heads up because I know that some people do not like fully sponsored content and videos on YouTuber channels, but they are a great way to support the channel and the content that I do make. And again, I do truly hope that you tune into it and see what that video does have to offer. But with all that being said, thank you so much for tuning in.