Decarbonization And Electrification Will Expand Renewable Opportunities

Key Takeaways

• Strong renewables growth, long-term contracts, and robust supply chain strategy drive stable revenues, resilient margins, and minimize policy and tariff risks.
  
• Leading access to low-cost, ESG-focused capital and a high proportion of contracted cash flows enable self-funded growth and improved long-term financial stability.
  
• Reliance on debt, exposure to legacy assets, project execution risks, rising competition, and climate-related threats could constrain growth and squeeze profitability.

Catalysts

Operates as a power generation and utility company in the United States and internationally.

• The acceleration of global renewable energy demand, especially from data centers and hyperscale corporate clients requiring fast, large-scale deployments, positions AES to expand its asset base and consistently sign long-term power purchase agreements, directly contributing to reliable and growing top-line revenues in the coming years.
  
• AES’s substantial multigigawatt renewables backlog, combined with its execution on record-sized projects such as the 2-gigawatt Bellefield solar-plus-storage complex, ensures significant EBITDA growth as these assets come online and ramp to full contribution, with over 60% renewables EBITDA growth projected year-over-year.
  
• The company's industry-leading supply chain strategy—front-loading equipment imports and building domestic manufacturing partnerships—severely limits exposure to tariffs and policy risk, preserving margin strength and allowing pipeline execution even during policy or trade disruptions, supporting stable earnings and net margins.
  
• AES’s ability to access large volumes of low-cost, ESG-aligned capital—evidenced by innovative transactions like the monetization of its insurance subsidiary and substantial green investment partnerships—reduces its cost of capital for renewables development, driving higher net margin expansion and self-funded growth through 2027.
  
• With roughly two-thirds of EBITDA sourced from contracted and regulated businesses—largely insulated from demand fluctuations or commodity price swings—AES is positioned for resilient free cash flow and improved credit quality, providing the foundation for reinvestment, dividend growth, and increasing long-term earnings power.

AES Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on AES compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming AES's revenue will grow by 9.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.8% today to 11.8% in 3 years time.
• The bullish analysts expect earnings to reach $1.9 billion (and earnings per share of $2.56) by about July 2028, up from $1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Renewable Energy industry at 38.5x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

AES Future Earnings Per Share Growth

Risks

• AES's ongoing dependence on debt financing and asset sales to support growth initiatives, combined with a recent drop in adjusted EBITDA and EPS compared to the prior year, indicates that rising interest rates or tighter credit could further constrain free cash flow and pressure earnings.
  
• The company's significant investment in large infrastructure and renewable projects faces execution risk, including potential project delays, cost overruns, or regulatory and permitting setbacks, which could lead to revenue shortfalls and reduced profitability.
  
• AES still has some exposure to legacy coal and gas assets, and as global regulations tighten and decarbonization accelerates, these assets could become stranded, resulting in impairment charges and high decommissioning costs that would negatively impact net margins.
  
• Accelerating competition in the renewable sector from both established utilities and new entrants, alongside the declining cost of renewable energy, may erode long-term contract pricing power and compress project returns, making it harder for AES to achieve sustained growth in revenues.
  
• Extreme weather events and climate-related risks, such as hurricanes and droughts, could cause physical damage to AES’s assets, leading to increased maintenance and operating expenses, higher insurance costs, and the possibility of asset write-downs that would put downward pressure on earnings stability.

Valuation

• The assumed bullish price target for AES is $21.56, which represents two standard deviations above the consensus price target of $13.72. This valuation is based on what can be assumed as the expectations of AES's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $16.1 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 11.6%.
• Given the current share price of $13.81, the bullish analyst price target of $21.56 is 35.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.