VST is not a buy; historical multiple expansion is exhausted, leaving slow cyclical growth (0-15%) less attractive than alternatives like Meta.

In today's video, we will talk about VST, which is Vista Energy. This stock quickly became one of the most requested stocks to talk about on my channel, and I started seeing this symbol appearing everywhere on social media as if it had appeared out of nowhere.

So, I spent the weekend examining the company’s business and investor materials , trying to understand what it really does, what its goal is, and what the optimists’ and pessimists’ arguments are regarding this stock.

In today's video, I want to share everything I've found so you can understand whether this stock is really interesting or just media hype. Let me start by pointing out that VST stock has risen by approximately 800% since its initial public offering in 2016.

However, the stock is currently undergoing a correction of approximately 31% .

What's interesting is that the CEO and two well-known investors are taking advantage of this correction to buy shares in the company. The CEO recently purchased $1.3 million worth of shares within the current open market price range.

Peter Thiel has made VST stock about 14% of his total fund portfolio, and David Tepper has made it 4.7% of his fund portfolio as well.

So, once again, the CEO and some well-known investors are buying the stock at the moment . I think this may be part of the reason for its widespread popularity on social media, and the reason for the many questions I receive daily about this stock as if it appeared out of nowhere.

Okay, let's start by discussing what Vistara Energy actually does. VST is an independent power producer, or IPP. It is a commercial generation company with a competitive retail business .

What this means is that Vestra sells electricity or energy in wholesale markets at prices determined by real-time supply and demand . When the grid supply is tight and demand is high, electricity prices rise and Vestra makes more profits.

But when supply is plentiful and demand is low, its profits also decrease.

This means that Vestra is more volatile than traditional regulated utilities, but it also benefits more from tight electricity markets when demand is high. This, in short, is the optimist thesis regarding the current performance of this company .

Vestra serves approximately 5 million customers in the residential, commercial and industrial sectors. The company is one of the largest competitive energy producers in the United States .

It has approximately 44,000 megawatts of generating capacity across a diversified portfolio of assets.

Within this portfolio, it possesses the second largest nuclear fleet in the United States . 56% of its production comes from natural gas, 19% from coal , 24% from nuclear power, and less than 1% from renewable energy.

So, Fistra is a well-diversified, independent energy producer in the United States.

Now, let's talk about the positive investment thesis. My first point here is that demand from data centers is causing an acceleration in electricity demand across the United States.

It is estimated that the United States will consume 50% more electricity by 2050.

Electricity demand across the United States is already increasing significantly after two decades of steady growth . Electricity generation in the United States reached a record high , increasing by 2.8% year-on-year , a significant rise in nationwide electricity demand.

Data centers, manufacturing, and the shift to electricity are driving energy demand upwards.

Electricity has also become a major bottleneck for the development of artificial intelligence, causing electricity providers to experience huge demand from major cloud computing companies.

In fact, Vestra recently signed 20-year power purchase agreements with both Meta and Amazon.

So, Meta and Amazon are working to secure long-term energy agreements with Vestra, which will provide the company with stable and growing cash flows over the coming decades.

The increasing demand for energy also puts strain on the grid and causes electricity prices to rise . Prices have risen by 36% since 2022 across the United States, and Vestra directly benefits from this.

The bottom line is that there are multiple positive factors driving up electricity demand and prices in America, which benefits independent power producers and enables them to achieve stronger growth. And that's what Vestra does.

The next slide of Fistra’s Q1 investor presentation details the two energy markets in which it operates and sells . These are the PJM and ERCOT markets, both of which are experiencing record demand.

When these two markets are combined, we find that they have been growing at about 3% annually since 2022, which is a strong rate for the energy market.

Fistra also expects annual growth of around 4% in its main markets over the next few years . This is a good indicator of future organic growth, as it means there is greater demand for energy for Vestra to sell .

Now let's talk about Fistra's guidance and growth forecasts. Well, in its recently released second-quarter report, Vista reaffirmed its financial guidance, with management stating that it would be at or above the midpoint of $7.4 billion in earnings before interest, taxes, depreciation, and amortization, and $4.3 billion in free cash flow before growth investments.

However, guidance for 2027 was set at $7.4 billion to $7.8 billion in earnings before interest, taxes, depreciation and amortization, but management stated that it is currently heading toward the lower end, meaning that 2027 is expected to be a year of little or no growth for the company.

But this next point is very important to understand, because Vistara’s guidance does not include Cogentrex’s recently announced acquisition and power purchase agreement with Meta, which the company estimates will generate about $700 million more in earnings before interest, taxes, depreciation and amortization combined.

So, overall, if these two deals go through, 2027 could end up with approximately $8.1 billion in earnings before interest, taxes, depreciation and amortization, which is equivalent to growth of about 8% over the next year.

Fistra also shared that it has a conversion rate of 60% of earnings before interest, taxes, depreciation and amortization to free cash flow before growth investments, meaning that Fistra expects free cash flow of approximately $5 billion for the next year.

And now, moreover, Fistra is intensively repurchasing shares. Therefore , the free cash flow per share actually accumulates faster than the net free cash flow measure. Vestra also stated that it expects to generate $10 billion in cash to use for growth and return to shareholders in 2026 and 2027.

It anticipates greater organic growth in 2028 because its energy prices are not fully fixed for that year, meaning it could benefit more from higher electricity prices if electricity demand remains strong until 2028.

This is when the company really expects to see stronger organic growth .

But for 2027, it currently forecasts organic growth of 0 to 2%. Now, let's talk about the company's valuation. So, from the outset, Vestra is projecting $4.3 billion in pre-growth free cash flow this year, and around $5 billion next year, 2027.

The company is currently valued at just over $50 billion in the stock market today, which puts it at 11.6 times this year's pre-growth free cash flow, and 10 times next year's.

Now, after researching the company's business throughout the weekend, I estimate that it could grow between 0 to 7% per year organically, 0 to 5% per year from acquisitions, and 1 to 5% per year from share buybacks.

All of this translates into annual growth of approximately 1 to 15% on an earnings per share basis .

The reason I do n't set an annual growth rate of 1 to 17% is that buybacks and acquisitions come from the same capital. If there are no acquisitions, share buybacks will increase.

If there are acquisitions, buybacks will slow down.

But if there are acquisitions, the company's share buybacks will slow down. In fact, buybacks slowed in the last year to less than 2% because they were buying more businesses and making bigger acquisitions.

Therefore, you can clearly see that acquisitions and repurchases come from the same capital and each affects the other. I also think that growth will be very volatile , and will not be at an annual growth rate of 10 to 15% each year because this business has been very volatile historically.

Once again, on an organic basis, next year is expected to be flat or with annual growth of no more than 2%.

Let me explain what I mean here. The graph you see on your screen shows Vista's earnings before interest, taxes, depreciation and amortization since its initial public offering in 2016.

You can see that its historical earnings have been very volatile, even going negative in 2020.

You can also see that the overall trend is upward, but this company's earnings growth is far from being steady. This is the same as the company's operating cash flows; when it went public in 2016, it actually had negative operating cash flows.

Operating cash flows then grew to $3.3 billion in 2019, then became negative from 2020 to 2021, then jumped hugely in 2023, and have now stood at around $5.1 billion since then.

But you can see that the company’s historical operating cash flow has also been very volatile. Finally, if we look at their earnings according to Generally Accepted Accounting Principles (GAAP), you can see that they were the most volatile ever.

It was negative in 2017, then positive, then negative from 2020 to 2022, then positive , and it is constantly swinging in every direction. So, here you can clearly see that the company’s earnings, operating cash flow, and net profits have all been cyclical over the past decade or so.

However, I would like to reiterate that although their profits and cash flows are cyclical, they are clearly trending upwards and growing.

However, this leads me to believe that Vistara's work is more cyclical in nature, and I believe that this is the nature of independent power producers (IPPs). I believe that going forward in the long term, it will prove that Vista's work will become cyclical again at some point .

Now, let me review with you Vistara's fast discounted cash flow (DCF) model here. In my discounted cash flow model, I assume EBITDA growth of 7% per annum over the next five years, trading at an 8x price-to-earnings ratio, and repurchasing 4% of shares per annum.

Using these parameters in the model, I get a compound annual growth rate of 12.65%, a fair value of $168, and a future share price of $265, which means the stock could achieve a total return of 78% over the next five years, which is not bad at all.

I believe this is a more realistic cash flow model for this business. Again, because the company's organic growth is not actually high, it is growing through acquisitions and share buybacks.

Therefore, an annual growth rate of 7% for earnings before interest, taxes, depreciation and amortization means organic growth of 3% per annum, plus about 4% growth through acquisitions, plus the repurchase of 4% of shares.

I think this is very realistic for the company. This is not a high-growth company . It is a utility company that is simply growing through the growth of electricity markets, rising energy prices, and the addition of some acquisitions.

Now, if we take a quick look at VST's historical earnings, we can see how volatile they have been historically. Therefore, I think pricing annual growth at 7% might be realistic, especially when looking at the bottom value.

But, during this period, I think we will see declines along the way , just as we have seen historically as well. Regarding the price- to-EBITDA multiple of 8, if we look at the graph of this multiple, we can see that Vistra’s historical average has been around 6.45 since its IPO.

Again, I am using a multiplier of 8, which is slightly higher than what the stock is currently trading at.

Therefore, I am taking into account some expansion in the multiplier, because I think the historical average of 6.45 is too pessimistic, as it includes periods such as 2023, when Vistra was sold at around 2.67 times earnings, which is a very low level for this business.

Therefore, I believe that a multiplier of 8 is the fairest for this business. If you think about it, if 60% of earnings before interest, taxes, depreciation and amortization are converted into pre-growth free cash flow, that is actually equivalent to a 13.3% price-to- free cash flow ratio using its pre- growth investment cash flows.

I believe that a valuation of 13.3 times free cash flow before growth investments for a highly cyclical utility company is a very fair valuation in all honesty.

Especially since it is a company that has not historically grown this fast, and I don't think it will grow this fast in the future either.

So, ultimately, I don't think it offers much value for a more cyclical energy product. So I think the question investors will ask me is: how can future returns be so low compared to the stock's historical returns?

Well, I think it's very important to understand where VST's historical returns actually came from. The following chart shows you the source of this stock's historical returns. It mostly came from the expansion of complications.

As we saw previously in the discounted cash flow analysis , Vestra was trading at around 2.3 times EBITDA in 2023.

As we see today, the stock is trading at around 7.4 times EBITDA. Therefore, the price-to-EBITDA ratio has almost tripled over the past three years . Here below, you can see that the price-to- earnings ratio has grown by 47.5%, while the total share price has grown by 70.7%.

Therefore, more than half of the stock price returns came from the expansion of the price-to-earnings multiple, and I don't think investors should expect the multiple to continue expanding at this rate or even expect it to expand any further from here.

In other words, I don't think future VST returns will resemble its historical returns because the main driver of those returns , which is the expansion of multiples, has now been largely exhausted.

So my final thoughts on VST are that it's a good company that benefits from increased energy demand. It is also good to see the CEO and some well-known investors buying shares in the company.

However, I don't think it will generate huge returns from here, and it's probably worth a little less than its fair value today, if I had to guess. I don't think a cyclical energy producer can sustain high multiples, but the market might really be drawn to it if it ends up growing higher in the foreseeable future due to a tighter electricity market .

I also think it is very important to understand that the vast majority of its returns came from the expansion of multiples.

As I said, I think this engine has run out of fuel. Future returns will more closely follow the company’s actual underlying growth, which I believe could range from 0 to 15% year-on-year, depending on how energy prices turn out.

To me, it looks like a company with slower, more cyclical growth, and its shares are trading at a low price. Therefore, it is not a purchase option within my investment portfolio.

I simply believe there are more attractive options in the market today, such as Meta.

When I compare Vystra and Meta, at least in my own portfolio, I find that Meta suits me much better. So, no, I will not buy Vistra shares.

I realize that it looks very cheap in the market right now, but I don't think I'll add it