By Adam Clark

It isn't a secret that utility stocks have been popular plays on the artificial-intelligence boom. But there are still some potentially undervalued companies out there, and Morgan Stanley analysts are looking to Europe for AI winners.

Why look to Europe? Morgan Stanley's Robert Pulleyn and colleagues think European power demand is set for sustained multiyear growth from 2026 for the first time since 2014. Plus, they say that Europe's utility sector is at an earlier stage in the AI-driven power surge than the U.S.

"If we assume Europe 2025 follows the same pattern as U.S. 2023, then Europe 2026 should see a mix of multiple expansion and EPS [earnings per share] upgrades," wrote Pulleyn.

That means there could be bargains to be had. The three top picks are power companies Centrica, RWE, and Engie, according to Morgan Stanley. Respectively, the three cover the U.K., Germany, and France, the largest European markets.

All three companies should benefit from European data center power demand increasing from 73 terawatt hours in 2025, or 2.5% of the total, to 167 TWh by 2030, around 5% of the total, and 295 TWh in 2035, reaching around 8% of European demand. Within that, the U.K. is set to represent 20% of the 2025-30 growth, France 17%, and Germany 15%, according to the estimates from analysts.

"We expect to see diverging power demand trends in large part driven by data center activity...We expect the strongest power demand outlook in the U.K., where we expect to see data center demand growth equivalent to 17% of current power demand by 2035," Pulleyn and colleagues wrote.

That is good news for London-listed Centrica. The Morgan Stanley analysts have a 210 pence target price on the stock, which was trading at around 169 pence on Wednesday, expecting it to deliver a total shareholder return of around 13%-14% based on its earnings outlook through 2030 and its dividend yield.

However, they have even higher expectations for Germany's RWE, putting its total shareholder return at 15%. They have an Overweight rating and EUR55 target price on the stock, which traded at around EUR44 on Wednesday, noting its recent sale of a data-center project at a former coal--plant site in the U.K.

"We consider RWE a key winner in this area with management indicating 3GW [gigawatts] available (10x 300 megawatts) for further potential site deals. We note that a site lease could be a more sustained higher multiple cash flow than a one off sale," Pulleyn and colleagues wrote.

France's Engie may only appeal to those who can stomach political uncertainty amid a series of unstable French coalition governments. However, the Morgan Stanley analysts have an Overweight rating and a EUR24 target price on the stock, which traded at around EUR22 on Wednesday. They peg its total shareholder return at around 10%, anchored by a dividend yield of close to 7%.

Write to Adam Clark at adam.clark@barrons.com

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December 03, 2025 10:39 ET (15:39 GMT)

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