An overlooked energy source could solve AI's power crunch - and these 2 stocks are prime plays

By Claudia Assis

Geothermal technology is in the early stages of its own shale revolution, Morgan Stanley says

Ormat's Ormesa power-plant complex in California. Improving geothermal technology and heightened power demand are creating the conditions for a "step-change" in the industry.

The same technologies that made the U.S. oil-and-gas shale revolution possible are being used to boost geothermal power generation, and hopes are building that geothermal will go from a niche renewable energy source to a solution for the artificial-intelligence power crunch.

Geothermal technology uses the Earth's heat to power turbines that create renewable electricity. Unlike solar and wind power, it produces clean energy around the clock.

The latest vote of confidence in geothermal energy came from Morgan Stanley analysts, who in a note Tuesday highlighted the industry's potential and the promising use of shale tools. The analysts also rated shares of two major geothermal-energy companies at the equivalent of "buy."

Morgan Stanley's call underscores how demand for electricity, turbocharged by the artificial intelligence-boom, is spurring more activity in renewables and making them more appealing to investors.

"Geothermal is in the early innings of its own 'shale revolution,'" the analysts wrote. "We see the convergence of rapidly improving geothermal technology and accelerating power demand creating the conditions for a step-change in industry growth."

Geothermal energy as a percentage of U.S. utility-scale electricity generation has been stuck around 0.4% for several years, whereas production from other renewables such as solar and wind has grown. As of last year, the country had geothermal power plants in seven states, according to the U.S. Energy Information Administration.

While there's vast potential in geothermal energy, in practice it had required finding geologic conditions that exist in only a few areas. Newer drilling technologies developed for oil-and-gas production, however, promise to engineer the ideal conditions anywhere. That includes enhanced geothermal systems, or EGS, which is at the center of Morgan Stanley's optimism about the industry.

"This is transforming geothermal from a niche, location-dependent resource into a scalable source of 24/7, low-carbon power," the analysts said. Moreover, EGS costs "have fallen rapidly as drilling performance improves, following a learning curve reminiscent of early shale development."

Two companies stood out for the analysts: Ormat Technologies (ORA) and Fervo Energy (FRVO).

Both stocks have been battered amid the broader selloff in power and AI-exposed names. Shares of Fervo, which became a public company in May at $27 a share, have traded under $10 for the past two weeks and are down nearly 60% in the past three months. Ormat shares have fared better, gaining about 3% in the last three months.

The recent pullback, however, created "more compelling" valuations, the Morgan Stanley analysts noted.

They rated Ormat shares at overweight with a price target of $123, representing upside of about 30% over Tuesday's prices.

The company offers "visible conventional geothermal growth through 2030, with EGS providing longer-term upside," the analysts said. The company also enjoys tailwinds such as its operational scale, in-house equipment capabilities and premier land and grid positions, they added.

"Stable base cash flow and established track record make the stock a lower-risk way to play geothermal growth," Morgan Stanley said.

Fervo, for its turn, is a pure-play EGS company with a "visible cost-reduction and growth road map, supported by strong commercial demand and learnings from the oil-and-gas industry," the analysts wrote.

Fervo CEO and co-founder Tim Latimer worked as a drilling engineer at BHP Billiton (BHP), "giving him direct exposure to horizontal drilling that Fervo later adapted for geothermal," they said.

Morgan Stanley rated Fervo shares also at overweight with a price target of $23, implying upside of nearly 180%. For Fervo, execution will be key, with Wall Street watching its operational progress over the coming quarters, the analysts noted.

Morgan Stanley also sees opportunities for traditional oilfield-services companies such as SLB (SLB), Halliburton (HAL) and Baker Hughes (BKR) getting in on the EGS action as geothermal power grows.

-Claudia Assis

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11-03-26 1457ET