MS Valuation Debates, ERCOT, Power Shortfalls, and Recommended Positioning

M August 24, 2026 04:01 AM GMT

Powered Shell Providers | North America Morgan Stanley & Co. LLC Idea

Equity Analyst We address PSP valuation debates, provide updates from time Michael N Infante Equity Analyst spent with management teams, clarify our views on the ERCOT

batch process, and provide our overall positioning. We remain Powered Shell Providers bullish on PSP upside, driven by our view that nearly all sites North America Industry View Attractive with grid interconnect will convert to host DCs.

Key Takeaways We expect to see many PSP-data center contracts by October, driven by the growing power and data center shortfall facing AI players.

Our REIT modeling is in-line with our current valuation methodology for our covered PSP stocks — and we also assess bear and bull approaches.

The PUCT hearing on Texas grid connection was a positive, with classification notification on August 31 and final results in mid-December.

OW-rated PSPs: CIFR, HUT, WULF, RIOT, GLXY. We also see significant upside potential in EW-rated APLD & UW-rated MARA. (Our ratings are relative to each other.)

We assess the range of risks and bear arguments relating to PSP stocks. On net, we believe bearish concerns are overblown.

Given persistent weakness among Powered Shell Provider (PSP) stocks, we are providing updates on a range of topics that have been the subject of investor debate. Let's start with the fundamental drivers that we see underlying the shareholder value creation potential among these stocks: (1) a growing shortage of power access facing the AI industry and (2) increasing lease rates for compute, which are driven by the shortage of compute and the increasing value of AI to a range of industries. Regarding #1, we believe the urgency to secure power has increased to a much greater extent than appreciated, and we expect many PSP announcements by October — this would be the latest possible date to begin construction on data centers that would come online before Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, year-end 2027. Regarding #2, we expect higher economics on compute lease rates to investors should be aware that the firm may have a conflict of translate into powered shell leases in the form of longer lease duration (20+ years), interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley higher yields on cost (though we expect average unlevered yields to remain below Research as only a single factor in making their investment decision. 20%), and strong credit support. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this We believe the weakness in many PSP stocks on Friday was in part due to report.

misinterpretation of commentary surrounding the ERCOT Batch process. There was a concern voiced that a transmission project in Texas (the 765 kV project), which may not move forward, would invalidate all studies conducted regarding interconnecting proposed data centers to the ERCOT grid. This is an incorrect interpretation, in our view. We actually view this development as a positive. Why? If the 765 kV project does not move forward, several projects in the Base Load group (those with potential interconnection dates in 2030-32) may be eliminated from this group, which would be helpful because the 65 gigawatts in this group could fall to a much smaller number, and this is positive because it means the Texas (ERCOT) grid would be more likely to be able to accommodate interconnecting this smaller set of projects. In our view, several of the PSP stocks we cover are favorable positioned from this development: CIFR, HUT, GLXY, and MARA. We would also flag that RIOT's sites are not subject to the ERCOT Batch process, and are therefore increasingly valuable, in our view.

More broadly, the recent Texas (PUCT) hearing regarding the Batch process was a positive development, in our view. At the August 20 PUCT hearing, ERCOT laid out proposed next steps which were approved by PUCT. See the ERCOT deck here. In our view, the next steps laid out by ERCOT are a positive development. By…