Why Alphabet Stock Popped on Monday

Key Points

• Alphabet will cooperate with American Electric Power to manage power demand in Indiana, the site of a new Google data center.

• The goal is to mitigate the effects of strain on the power grid as the new data center comes online.

• The side effect may be cheaper power for Alphabet, and a more secure power supply.

• 10 stocks we like better than Alphabet ›

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock, the parent company to Google, skipped 2.6% higher through noon ET Monday after announcing it has signed a "special, joint contract" with Indiana Michigan Power (I&M), a subsidiary of electric utility company American Electric Power (NASDAQ: AEP).

AEP stock is up 1.2%.

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Image source: Getty Images.

Google and AEP: Better together?

The goal of this contract, say the companies, is to support "I&M's ability to provide reliable and affordable service for all customers as communities continue to experience significant economic growth."

And the subtext to all that is that Google's efforts to grow its artificial intelligence (AI) business, its data server farms, and its power needs may place a strain on I&M's ability to generate and deliver power to other "communities" of customers. To mitigate this strain, "Google will leverage new capabilities that allow it to reduce or shift electricity demand to carry out nonurgent tasks during hours when the electric grid is under less stress."

Is this good or bad news for Alphabet stock?

The companies didn't provide any financial figures for how their contract will work, or whether Google will be providing financial support to AEP. Still, if successful, the cooperation between Google and AEP will help to smooth out electricity demand, lower "peak load" demand for electricity, and reduce power costs.

This would be a benefit to both AEP and Google, lowering the latter's costs and ensuring it has the power it needs, when it needs it, particularly to support its planned $2 billion data center investment in Fort Wayne, Indiana. While it doesn't necessarily "move the needle" much on Alphabet stock, I'd say it's still a net positive for the company.

And with Alphabet stock costing only 20x earnings and still growing rapidly, that's good news for investors.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.