TSMC And NVIDIA Investments Will Modernize Arizona Grid Infrastructure

Key Takeaways

• Strategic expansions and infrastructure investments in Arizona's booming sectors are set to boost electricity demand and Pinnacle West Capital's revenues.
  
• Investment in digital platforms and strategic capacity planning is expected to enhance customer satisfaction, reduce costs, and support future earnings growth.
  
• Regulatory uncertainties and increased expenses are impacting Pinnacle West Capital's financial performance and future earnings prospects, with competitive pressures on revenues and investments.

Catalysts

Through its subsidiary, provides retail and wholesale electric services primarily in the state of Arizona.

• The expansion and investment in Arizona, particularly in the semiconductor and advanced manufacturing sectors, such as TSMC's additional $100 billion investment, NVIDIA's operations, and the healthcare sector, underscore Arizona's growth. This economic boom is expected to drive significant demand for electricity, thereby boosting Pinnacle West Capital's future revenues.
  
• The company's robust grid and transmission infrastructure plans, including the construction of multiple high-voltage lines and substations, aim to cater to the growing demand and ensure reliability, which could result in increased future earnings through improved service efficiency and customer satisfaction.
  
• Pinnacle West is enhancing its customer experience through investments in advanced digital platforms, which are intended to lower operational costs over time and improve net margins.
  
• The company plans to procure at least 2,000 megawatts of new resources for service between 2028 and 2030. This strategic move is likely to support future earnings by ensuring sufficient capacity to meet rising customer demands.
  
• The upcoming rate case filing and formula rate proposal are strategies to mitigate regulatory lag and recover costs associated with infrastructure investments, which should help stabilize and potentially improve earnings and net margins post-implementation.

Pinnacle West Capital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pinnacle West Capital's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.3% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $733.2 million (and earnings per share of $5.73) by about May 2028, up from $587.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, up from 19.0x today. This future PE is greater than the current PE for the US Electric Utilities industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 5.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Pinnacle West Capital Future Earnings Per Share Growth

Risks

• Regulatory uncertainties due to upcoming rate case filings and the need to update the rate structure for high load factor customers could impact revenue stability and financial performance.
  
• The company's recent financial performance showed a loss for Q1 2025 compared to a profit in Q1 2024, driven by increased O&M, interest expenses, and depreciation, which may pose a risk to future earnings.
  
• The planned outage costs and additional IT project expenses are influencing O&M negatively, which could strain net margins if not offset by increased operational efficiencies or higher revenues.
  
• Regulatory lag and the transition to a formula rate could impact the ability to earn the allowed ROE promptly, potentially affecting earnings and cash flow in the interim.
  
• Rising competition for attracting and integrating high load factor customers and the uncertainty around future infrastructure needs and investments could pressure future revenue streams and return on investments.

Valuation

• The analysts have a consensus price target of $95.93 for Pinnacle West Capital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $109.0, and the most bearish reporting a price target of just $80.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.9 billion, earnings will come to $733.2 million, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $93.47, the analyst price target of $95.93 is 2.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.