These days, unlike a few years ago, discussions about renewable energy stocks aren't just narrowly focused on solar and wind power. Instead, nuclear energy stocks like Cameco (CCJ -0.13%) are also commanding attention from investors seeking alternative energy exposure.
Investors also recognize that artificial intelligence companies are placing sizable power demands on data centers, and nuclear power is increasingly being considered as a way to meet these demands.
But that attention alone doesn't suggest that Cameco is a screaming buy right now. In fact, there are valid points to be made for both the bull and bear cases for buying Cameco stock. Let's see how two Motley Fool contributors sum up the arguments.
The energy market and corporations are moving toward nuclear power
Lee Samaha: This company -- comprising uranium, nuclear fuel services, and nuclear plant services (via its 49% interest in Westinghouse) -- is a pure play on the growth of nuclear power.
Cameco currently serves 37 nuclear utilities worldwide, but there's a clear emphasis on the Americas (U.S., Canada, and Latin America), with 58% of its sales volume going to that region. It has a controlling interest in high-grade mineral reserves in Saskatchewan and further afield in Kazakhstan, with exploration activity focused on North America.
As such, it's a play on the growth in demand for nuclear energy. That's difficult to predict in a "join the dots" fashion. In other words, buying into Cameco stock is more about buying into a belief that interest in nuclear-powered energy will increase.
Fortunately, there are reasonable grounds for confidence on the matter. For example, Microsoft recently signed a 20-year power purchase agreement with Constellation Energy to provide power to its data centers -- a deal that will restart the Three Mile Island nuclear power plant in Pennsylvania. Moreover, investors have bid up Vistra stock in anticipation that it can sign similar agreements given its nuclear capability.
On top of these developments, the long-term case for nuclear to meet energy needs is robust. Not only does atomic power not emit carbons, but it provides a reliable energy source compared to renewables' intermittency. In addition, it can be utilized in parts of the world that can't use renewables or gas as an energy source economically.
As such, growing demand for nuclear reactors will likely lead to burgeoning demand for Cameco's uranium and services over the long term.
Nuclear power enthusiasm has driven the stock to a lofty valuation
Scott Levine: It's not only the deal that Microsoft inked with Constellation Energy that's driving investor interest in nuclear power stocks. There's also Amazon's recently announced partnership (including a $500 million investment) with utility Dominion Energy to develop small modular reactors for its cloud computing business.
Other deals as well are electrifying the market's enthusiasm for stocks like Cameco. And it's likely that similar deals will continue to be made in support of the burgeoning AI industry.
For investors looking to gain exposure to nuclear power stocks, the problem lies in the fact that Cameco stock is now trading at a frothy valuation after shares have soared about 35% since the start of the year. Currently, shares of Cameco are changing hands at about 48 times operating cash flow, a steep premium to their five-year average cash flow multiple of 30 or so. And if that's not startling enough, consider the fact that shares are valued at 133 times trailing earnings.
Clearly, investors' expectations are sky high in driving the stock to such a lofty valuation. While exuberance for Cameco stock is rampant right now, it's likely that it will soon fade, and shares will retreat from the all-time high that they recently touched.
Yet for those insistent on gaining nuclear power exposure, a savvier option may be to pick up shares of a nuclear power exchange-traded fund (ETF) such as the VanEck Uranium and Nuclear ETF (NYSEMKT: NLR). In doing so, investors needn't worry that they're forsaking Cameco as it's the third-largest position in the ETF with a 6.8% weighting.
Is now a good time to power your portfolio with Cameco?
A leader in both uranium production and providing nuclear plant services, Cameco is shining brightly on investors' radars these days. With growing interest in the adoption of nuclear power as a way to meet the steep power demands of data centers, Cameco is a compelling option; however, those who are unwilling to pay a premium for Cameco stock may be better off investigating alternate options such as the VanEck Uranium and Nuclear ETF.
