The Strategic Shift in Utility Valuations: Can AI and Energy Megatrends Justify a Reassessment of Undervalued Utilities?

The utility sector, long viewed as a defensive play, is undergoing a quiet but profound revaluation. As artificial intelligence (AI) and energy-intensive onshoring initiatives reshape global infrastructure demand, traditional utilities are being overlooked despite their critical role in enabling these megatrends. American Water Works Company (AWK), a bellwether for the sector, exemplifies this disconnect. While recent analyst downgrades and mixed credit ratings have cast a shadow over its stock, a deeper analysis reveals a company poised to benefit from the infrastructure demands of AI and onshoring-factors that could catalyze a re-rating of its valuation.

The Contrarian Case for AWK: Downgrades vs. Long-Term Catalysts

AWK has faced mixed analyst sentiment in 2025, with Evercore downgrading its rating to Hold in February and Jefferies upgrading it to Hold in March, citing a post-merger valuation alignment. S&P Global affirmed its 'A' credit rating in October, underscoring stability. Yet these actions mask a broader narrative: AWK's infrastructure investments and strategic positioning align with the surging water demands of AI data centers and onshoring-driven industrial growth.

The company's 2025 capital expenditure plan of $3.2 billion and a decade-long $46–$48 billion roadmap for infrastructure upgrades are not just operational necessities-they are direct responses to the growing strain on water systems from AI and data center expansion. According to the American Water Works Association (AWWA), large data centers could consume up to 5 million gallons of water daily for cooling, a demand that utilities like AWK are uniquely positioned to meet.

Valuation Metrics: A Contrarian Edge

AWK's current price-to-earnings (P/E) ratio of 23.1x exceeds the Water Utilities industry average of 16.3x, suggesting overvaluation. However, this metric fails to account for the company's robust infrastructure pipeline and long-term growth targets. AWK's 2025 earnings guidance of $5.70–$5.75 per share and 2026 projections of $6.02–$6.12 (8% growth) highlight a compound annual growth rate of 7–9% in earnings and dividends. These fundamentals, coupled with a price-to-book (P/B) ratio of 2.34–2.35 according to Macrotrends, suggest a stock that is neither overvalued nor undervalued but rather mispriced in the context of its strategic role in AI and onshoring.

Moreover, AWK's liquidity position is formidable. The company plans to draw down $1.15 billion via equity forward sale agreements in mid-2026, ensuring capital flexibility for its $46–$48 billion capital plan. This financial discipline, combined with a dividend yield that historically outperforms peers, positions AWK as a resilient long-term play.

AI and Onshoring: The Unseen Infrastructure Link

While AWK has not yet inked direct partnerships with tech giants like Amazon or Microsoft, its industry-wide advocacy and infrastructure investments are indirectly aligned with AI's water demands. The AWWA's white paper Cooling the Cloud: Water Utilities in a Data-Driven World-a project AWK supports-highlights the need for utilities to adapt to data center water consumption. Meanwhile, AWK's onshoring initiatives, such as its $586 million 2025 infrastructure plan in Pennsylvania and $520 million 2024 investments in New Jersey, directly support the energy and water needs of manufacturing and data center clusters.

The U.S. Bureau of Reclamation's recent contract with Upstream Tech to deploy AI in water forecasting further underscores the sector's technological evolution. AWK's infrastructure upgrades, including smart drainage systems and reclaimed water projects, align with these innovations, ensuring it remains a key player in the AI-driven infrastructure boom.

Risks and Mitigants

Critics argue that AWK's valuation premium and regulatory risks could dampen returns. However, its credit rating stability, strong cash flow, and merger with Essential Utilities-creating a $63 billion water and wastewater utility-mitigate these concerns. The merger expands AWK's footprint to 17 states, enhancing its ability to capitalize on regional onshoring and AI-driven infrastructure needs.

Conclusion: A Re-Rating Awaits

The market's current focus on short-term analyst sentiment overlooks AWK's strategic alignment with AI and onshoring megatrends. As data centers and energy-intensive industries strain water systems, utilities like AWK will become indispensable. With a disciplined capital plan, strong liquidity, and a forward-looking approach to infrastructure, AWK represents a contrarian opportunity for investors willing to look beyond near-term volatility.