NuScale Power (NYSE:SMR) is a nuclear power startup that has developed small, modular reactors that can be placed for on-site power generation as needed.
These smaller reactors offer several advantages compared to larger nuclear reactors, and may well create substantial demand for NuScale’s design as American requirements for electricity keep rising.
So, is NuScale the best nuclear stock to buy now, or is the company still at too early a point in its history to invest in?
Small Nuclear Reactors Supply Growing Power Needs
Despite being an excellent solution for providing base load power generation, nuclear reactors have historically been hindered by their high costs and large footprints.
SMRs solve these problems by miniaturizing nuclear reactors and making them easier to deploy, thus cutting down on both the expense and the timeline for generating nuclear power once they are on-site.
The smaller size of these reactors also cuts down on cooling requirements, one of the traditional engineering challenges associated with larger reactors.
SMRs are also the only current nuclear power technology that has the potential to leverage economies of scale. While larger, more traditional nuclear reactors are built on-site, SMRs are manufactured in factories before being moved to where they are needed.
As such, a business like NuScale that plans to produce SMRs has the potential to realize gradually higher per-unit profits as its manufacturing scales up.
SMRs could be particularly useful in supplying the growing power needs of data centers. By 2028, data centers are forecast to consume as much as 12% of US power output, up from 4.4% today. As a modular and scalable power generation solution, SMRs could help to power data centers without straining existing electrical infrastructure.
Does NuScale Have a Competitive Advantage in Its Market?
Ordinarily, it’s quite difficult to establish which businesses have competitive advantages in cutting-edge fields like SMR manufacturing. In NuScale’s case, however, it seems fair to say that the business has at least the makings of a moat by virtue of having received the only SMR design approval from the US Nuclear Regulatory Commission to date.
Though other startups could eventually catch up, this puts NuScale solidly ahead when it comes to commercializing SMR technology.
NuScale hasn’t just gotten regulatory approval for its reactors but has also begun to line up buyers and manufacture a small number of reactors. As of Q1 reporting, NuScale was in the process of manufacturing 12 of its SMRs.
The business plans to begin delivering reactors by 2030, putting it on a good track to generate significant commercial revenue early next decade. Prospective customers include both private sector businesses and government entities.
NuScale is also building out its supply chain and putting itself in a position to scale up its manufacturing in the years to come.
NuScale also has a strong balance sheet that will help it deploy SMRs commercially. As of the end of Q1, NuScale reported $521.4 million in cash, cash equivalents and short-term investments. This, coupled with a lack of long-term debt, gives NuScale a good financial foundation on which to build.
Sky-High Valuation and Share Dilution
While there are obviously many positives to NuScale, there are also some fairly major risks associated with it as well. One of the most apparent of these is its valuation. At 78x sales, SMR shares look very expensive.
Much of this is due to the appreciation the stock has seen over the last 12 months, during which shares of SMR have climbed by over 260%.
Although revenue is likely to spike when NuScale begins delivering its SMRs, this is still quite a high price to pay for future revenues on an uncertain timeline.
At over $40 per share, NuScale has also blown past the analyst consensus price target of $31.66. Indeed, $41 per share is the highest current price target for SMR shares. Still, this hasn’t stopped institutional buyers from snapping up nearly 60% of NuScale’s shares.
A more immediate issue for shareholders may be NuScale’s habit of issuing new shares as a source of funding. While even moderate dilution can cause concern for shareholders over long enough periods of time, NuScale has expanded its base of outstanding shares by double-digit percentages consistently over the last two years.
Cumulatively, this has caused the number of outstanding SMR shares to rise from just 42 million when the company first went public to 128 million today. Though this obviously hasn’t kept share prices down over the last 12 months, this trend could be worrying for shareholders looking at NuScale as a long-term investment.
Is NuScale the Best Nuclear Stock to Buy?
NuScale has a great deal going for it at the moment. Having received design approval for its SMRs and with 12 reactors already being manufactured, the business appears to be winning the race to commercialize small reactor technology.
The benefits of first-mover advantage in this space could be quite large, especially given how quickly energy demand is growing as EVs and data centers eat up more of America’s power output. Between this advantage and its strong balance sheet, there’s a great deal to like about NuScale’s long-term position.
At the same time, NuScale still has the hallmarks of being a high-risk, speculative stock. The gains of the last year have taken the stock’s valuation to a point where it will have to deliver extremely high revenue growth, while investors still have to worry about the chance of further share dilution. Even with NuScale’s leading position in commercializing SMRs, these risks are quite difficult to ignore.
Right now, SMR’s speculative valuation and the odds of further dilution make it quite a high-risk investment. The market opportunity for SMRs in the years to come, however, could be high enough to justify it over the long term. While SMR does look potentially attractive on that basis, it’s likely a stock that will only interest investors who have a rather high risk tolerance.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.