Mackenzie Tatananni

Talen Energy is positioned to capitalize on an existing data-center contract with Amazon.com, which should provide the stock even more room to grow, Jefferies analysts said on Friday.

Analysts led by Paul Zimbardo maintained a Buy rating on shares of the power producer but lowered their price target to $260 from $269. Talen stock was down 0.9% to $211.06 on Friday, with the new price target implying potential upside of 23%.

The analysts noted that the share price had declined recently "with little data center value priced in." While the stock has fallen from a record closing high of $250.37 in mid-February, it remains up 5% this year and up nearly 142% over the past 12 months.

The Jefferies team pointed to ramping competition and uncertainty to securing high-value contracts, arguing that these factors have hurt merchant nuclear companies, which sell power directly into the market in the absence of upfront power-purchase agreements.

While analysts and investors alike have "significantly soured" on the prospects for existing nuclear power plants to secure long-term, above-market power contracts, Talen is a different breed due to its existing relationship with Amazon.

Last March, the energy-infrastructure company announced the sale of a Pennsylvania-based hyperscale data center campus to Amazon Web Services for $650 million. The center has capacity for up to 960 megawatts and is located next to Talen's Susquehanna plant, which will supply it with power.

During an investor update shortly after the announcement, CEO Mac McFarland indicated that the deal was part of the company's comeback plan after exiting Chapter 11 bankruptcy protection in May 2023.

"We would not have built a spec datacenter campus, but when we exited bankruptcy, that didn't matter," McFarland said. "We had the assets and we needed to create value out of these assets in the best way possible."

However, the arrangement quickly encountered headwinds. In November 2024, the Federal Energy Regulatory Commission struck down a bid to expand the power-purchase agreement beyond an initial 300 megawatts.

Talen filed suit against the FERC at the end of January, and McFarland indicated during the company's fourth-quarter earnings call that regulatory challenges weren't stopping the partners from moving ahead.

"We have an existing relationship with a hyperscaler who shows no signs of pulling back on growth and has invested material capital and sweat equity into the Susquehanna agreement to date and on an ongoing basis," the CEO said.

Jefferies analysts noted on Friday that Talen is the only independent power producer with an existing data-center contract. "We expect the two parties to deepen their relationship with Amazon actively building the data center today," they wrote.

The analysts' base case is that Talen and Amazon rework the agreement into a front-of-the-meter arrangement. This means Amazon will have to pay transmission charges, as opposed to the current behind-the-meter construct, which is meant to bypass the grid.

The Jefferies analysts moderated their pricing assumption to $75 per megawatt hour from an earlier range of $80 to $85.

Overall, they remain bullish on the shares, arguing that Talen is set to benefit from industry trends including ramping energy demand from data centers and the growing value of firm capacity.

"These trends translate into multiple sources of potential upside that could drive both increased profitability and multiple expansion," the analysts wrote. In their view, Talen has "high visibility on substantial earnings growth in the next few years, driven by the dramatic increase in capacity prices."

They aren't the only optimists on Wall Street. All 13 analysts polled by FactSet rate Talen stock at Buy or the equivalent.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

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March 21, 2025 14:56 ET (18:56 GMT)

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