MMR

Nuclear Stocks Could Help AI Keep the Lights On

Electrical utility and nuclear energy stocks are linked to any AI developments

Managing Editor
Oct 29, 2024 at 11:20 AM
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Subscribers to Chart of the Week received this commentary on Sunday, October 27.

It’s okay to be excited about the future applications of generative artificial intelligence (AI) while still being very skeptical of its current viability. Generative AI has ‘concepts of a plan’ for the future, but for now, everyday AI functions range from helping write emails to making deepfake memes. While we wait for AI to become this paradigm shifting technology its being marketed as, the real opportunity for investors lies with who’s keeping the lights on.

Last week, Amazon.com (AMZN) and Alphabet (GOOGL) scored major nuclear power agreements with privately-owned small modular reactor (SMR) companies Energy Northwest and Kairos Power. Big Tech is going all in on nuclear energy, because to power all of these artificial intelligence forays, data centers are burning through power grids and tarnishing climate pledges focused on reducing carbon emissions. It’s this same rabid demand that has sent the utility sector to absurdly high gains in the last 12 months. The Utilities Select Sector SPDR Fund (XLU) is up 28% year-to-date, outpacing the SPDR S&P 500 ETF Trust’s (SPY) 22% gain in the same timeframe.

 

Utility Nuclear Stocks

Utility companies of the past were defined as safe, almost boring investments, but thanks to AI, have suddenly been injected with a lucrative growth component. Someone has to power all these AI passion projects that have captivated Silicon Valley, and the utilities sector has risen to the demand challenges, while melting up the charts in the process.

Per a VOX report over the summer, if ChatGPT were integrated into the 9 billion searches done each day, the International Energy Agency (IEA) says, electricity demand would increase by 10 terawatt-hours a year — the amount consumed by about 1.5 million European Union residents. Ignoring for a second the damning environmental implications, that’s an overwhelming amount of demand the utility sector has to accommodate. These massive power needs are draining the U.S. power grid, and given the stop-and-start developments of wind and solar energy, Big Tech companies are looking elsewhere for suitors to foot the bill.

AI Energy COTW

The best-performing stock on the S&P 500 (SPX) this year is not Nvidia (NVDA). It’s boring, old electrical utilities stock Vistra Corp (NYSE:VST), one of the largest power producers in the U.S that’s up 227% year-to-date and 284% year-over-year. Sector peer Constellation Energy Corp (NASDAQ:CEG), meanwhile, made waves earlier in the summer after linking up with Microsoft (MSFT) to restart Three Mile Island in Pennsylvania, the site of the country’s worst nuclear-power accident. CEG is 126% higher in 2024 and up 136% in the last 12 months. Both VST and CEG have recently consolidated below record highs, but there isn’t much short squeeze potential, with 1.8% and 4% of the stock’s total available float sold short, respectively.

There doesn’t need to be contrarian potential if these utility companies continue to dominate the market share while staring down overwhelming demand. Per a CNBC report, a recent Energy Department memo projects U.S. power grids could see as much as 25 gigawatts of new data center demand by 2030. As reported by the IEA, Global electricity consumption is expected to double from an estimated 460 terawatt-hours (TWh) in 2022 to more than 1,000 TWh in 2026.

In the same way that utility stocks are shedding the stigma as boring and stable, nuclear energy is shedding its reputation as a taboo power source. The restarting of Three Mile Island is a massive coup for nuclear energy, while SMR’s – although there are no operational ones in the U.S. right now – are poised to be the smaller yet mightier reactors sorely needed to meet rising demand. Canada-based uranium producer Cameco (CCJ) is 27% higher year-to-date and hit a record high of $58.72 on Oct. 21. Cameco has three uranium mines in its stable, and uranium prices just received a lofty price target of $135 from Bank of America, after consolidating around $80 in recent months.

There’s also Oklo Inc (NYSE:OKLO), a Sam Altman-backed fission power plant that has seen its stock add 133% this month alone after inking a SMR deal with Amazon.com. OKLO has seen trading volume and social media chatter explode in the last few weeks, with retail traders salivating at short interest up 37% in the most recent reporting period and the 8.58 million shares sold short accounts for a healthy 10% of the stock’s total available float. Considering only two brokerages are covering the Wall Street newcomer (Oklo’s SPAC went live on May), analyst notes could provide more tailwinds.

Centrus Energy Corp (NYSE:LEU) gapped higher by 26.3% on Oct. 16 and by 216% on Oct. 18, after the company was awarded U.S. Department of Energy contract that focused on expanding domestic production. Despite a 57.5% year-to-date gain, a healthy 13% of LEU’s total available float is short, indicating there could still be room to run on the charts, despite a 12% pullback this week. NuScale Power Corp (NYSE:SMR) and Nano Nuclear Energy Inc (NASDAQ:NNE) are two other names to keep an eye on, up 463% and 39% respectively, in 2024 yet still with short squeeze potential.

Looking at all these outsized gains from nuclear and electric utility stocks this year, it’s understandable to be skeptical of this sustainability in the years to come, especially because technology like SMR’s is yet to really take off. But digging into the numbers shows a sustainability that should excite investors. If demand shows no signs of stopping and bearish bettors keep sniffing around, the tailwinds could blow into 2025 and beyond.

 

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