Trump Policy Shift on PJM Power Plants Exposes Constellation Energy's Valuation Vulnerabilities

What happened

The Trump Administration unveiled a statement of principles requiring tech giants to bid for funding new power plant construction in the PJM mid-Atlantic region, a core market for Constellation Energy (CEG). This policy introduces potential new, well-capitalized competitors that could undermine CEG's ability to secure premium-priced, long-term contracts with hyperscalers like Microsoft and Meta, key to its AI-driven growth narrative. According to the DeepValue report, CEG trades at ~39x trailing EPS, embedding aggressive assumptions about sustained AI demand and policy support, with limited margin for error. The announcement directly challenges CEG's moat in providing clean, firm power, exacerbating risks already highlighted in the report, such as capex overruns and competitive pressures. As a result, investors sold off CEG shares, reflecting heightened concerns over future earnings visibility and multiple compression.

Implication

This development signals a material shift in the competitive landscape, where tech giants funding new plants could erode CEG's market share and contract spreads in PJM, a critical region for its AI-linked revenue. It amplifies the DeepValue report's downside risks, such as capex inflation and policy headwinds, likely pushing implied value toward the bear case of $260 if guidance weakens. Management must now demonstrate flawless execution on projects like Crane and Calpine integration to offset this threat, but the high valuation leaves little room for disappointment. Investors should closely monitor upcoming combined-company guidance and any new PPA announcements for signs of resilience or deterioration in contract economics. Overall, this reinforces the need for cautious position sizing and waiting for a more attractive entry point below $280, as per the DeepValue report's assessment.

Thesis delta

The DeepValue report already identified policy changes and competitive intensity as key risks to CEG's premium valuation; this news materializes those risks, increasing the likelihood of the bear case scenario. Specifically, it shifts the thesis by highlighting an immediate threat to CEG's AI-driven contract economics, which could necessitate a downward revision in the base case implied value from $320 if competition intensifies and policy support wanes.