Global Decarbonization And Electrification Will Fuel Renewables And Storage Expansion

Key Takeaways

• AES's advantages in data center partnerships, supply chain strategy, and digital grid solutions position it for higher recurring revenue, superior margins, and accelerated market share gains.
  
• Strategic flexibility, strong execution on asset transitions, and M&A potential allow AES to capitalize on industry shifts, enhancing earnings visibility and long-term growth prospects.
  
• Rising costs, regulatory uncertainty, and international risks threaten profit margins and earnings growth despite strong demand and continual investment in renewables and infrastructure.

Catalysts

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

• Analyst consensus sees significant renewables EBITDA growth from new projects and data center demand, but this likely understates the compounding effect of AES's dominant position with hyperscale data centers, which is set to deliver not only substantially higher recurring revenues but also higher-than-peer margins as PPAs increasingly reflect a premium for reliability, speed to power, and technological integration.
  
• While analyst consensus views AES's supply chain strategy as ensuring stable costs, in reality, AES's first-mover advantage in domestic content, AI-driven solar deployment (Maximo), and nearly completed safe-harbored inventory positions AES to accelerate project commissioning and capture outsized EBITDA growth and market share as regulatory deadlines compress and competitors face greater bottlenecks and delays.
  
• With its leadership in energy storage and digital grid management (e.g., via Fluence and utility-scale projects), AES stands out to benefit disproportionately as the electrification of transportation and industry creates exponential load growth and new ancillary revenue streams-translating into structurally higher EBITDA margins and multi-year upward earnings revisions.
  
• AES's execution of gigawatt-scale coal-to-gas conversions and its track record in both U.S. and international markets uniquely position it to serve as a "flexible baseload" provider, enabling it to win major regulated and contracted opportunities as older thermal assets retire, thereby supporting long-term, higher-visibility growth in rate base, free cash flow, and earnings per share.
  
• Industry consolidation and macro policy uncertainty will create distressed asset acquisition opportunities for well-capitalized developers; AES's balance sheet strength and historical M&A discipline set the stage for high-IRR bolt-on deals, raising the probability of both accelerated top-line growth and multiple expansion as it absorbs projects and talent from weaker players.

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 10.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.6% today to 11.7% in 3 years time.
• The bullish analysts expect earnings to reach $1.9 billion (and earnings per share of $2.68) by about August 2028, up from $919.0 million 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 11.6x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the US Renewable Energy industry at 37.3x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

AES Future Earnings Per Share Growth

Risks

• Higher global interest rates and the company's ongoing need for large-scale capital expenditures to fund renewables and utility investments could increase borrowing costs, leading to higher interest expenses and putting pressure on net income and free cash flow.
  
• The power purchase agreement market for renewables is becoming more commoditized, and although strong corporate demand (especially from data centers) is cited, long-term downward pressure on PPA prices from competition may compress future profit margins and limit earnings growth.
  
• AES remains exposed to political and currency risk in international operations, such as Colombia and Chile, and past asset sales reflect ongoing earnings volatility and less predictable revenue streams from these regions.
  
• The industry's accelerating pace of technological change and the need for infrastructure upgrades could force AES into higher-than-expected maintenance and replacement costs, which may erode long-term profitability and strain EBITDA margins.
  
• Policy and regulatory uncertainty-including the eventual sunsetting of renewable tax credits and potential shifts in permitting, tariffs, or grid requirements-introduce significant risk that future projects after 2027 may face reduced incentives, higher costs, or regulatory obstacles, negatively impacting revenue visibility and projected earnings.

Valuation

• The assumed bullish price target for AES is $21.95, which represents two standard deviations above the consensus price target of $13.83. 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 $16.4 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $12.85, the bullish analyst price target of $21.95 is 41.5% 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.