NuScale Power (SMR -10.59%) is an upstart looking to be at the forefront of what could be a massive overhaul of the nuclear power industry. That's the hope, anyway. At least one notable utility industry veteran doesn't think NuScale Power's approach to nuclear energy is going to work out as well as investors seem to hope right now, given the stock's rapid ascent of late (the stock is up 400% in a year!). Here's how investors should be thinking about NuScale Power.
NuScale Power is a high risk investment
It is important to recognize right up front that NuScale Power is not for the faint of heart. First you need to believe in the long-term future of nuclear power. Then you also need to believe that an untested approach to generating nuclear power is likely to succeed. And then you need to be willing to own a company that is bleeding red ink as it works to build a business around that untested approach. Only the most aggressive investors should probably be looking at NuScale Power.
Image source: Getty Images.
The big story here is that NuScale Power is attempting to build small scale modular nuclear reactors (SMRs). Although theoretically interesting, the technology hasn't been tested in any meaningful way. However, if it can be developed, there are a lot of potential benefits. For example, building small reactors is likely to be easier and, at scale, cheaper than building large nuclear reactors. Small reactors are also likely to be safer than large ones. And, given the modular design, they will likely be easier to place where they are needed.
However, getting from a concept to a full-fledged product is not an easy or cheap process. And it is even harder when you add in the justifiably heavy regulation around nuclear energy companies. Which are all parts of the problem that NextEra Energy (NEE -0.36%) CEO John Ketchum was highlighting when he questioned the opportunity of small scale modular nuclear reactors during his company's third quarter 2024 earnings conference call.
An end of the NEXT decade opportunity
To be clear, Ketchum isn't suggesting that small scale reactors are a dead end. In fact, he noted that NextEra Energy is closely monitoring the technology. But, at this point, he doesn't see it playing a material role in the energy market until the "end of the next decade." That means the technology will need to continue developing for another 10 to 15 years before it is ready for prime time.
That's actually not an unrealistic view of the situation and, as the CEO also noted, there are only "a handful [of SMR companies] that really have capitalization that could actually carry them through the next several years." If a company can't make it through "the next several years" it probably won't be able to make it for another decade filled with heavy spending on the research and development and capital investments needed to bring small scale nuclear reactors to market. To that end, NuScale Power, which benefits from the backing of financially strong construction company Fluor (FLR -1.20%), is clear in its 10-K that it is likely to continue bleeding red ink for years to come. So Ketchum's somewhat dour outlook shouldn't be a shock to anyone, particularly not to investors in NuScale Power.
NextEra CEO also noted another aspect of the problem, highlighting that small scale modular nuclear reactors are still very expensive because they are a new technology. This is true of just about any new technology, since building the first of anything is usually pretty costly. You won't see costs drop until production starts at scale. Which, of course, can't happen until a prototype is built and tested. But even then, NuScale Power, and every other SMR company, will still have to build a manufacturing facility and ramp up production, which is no easy task, either. NuScale Power is still at the very beginning of a very long journey.
NextEra's CEO is being realistic
Ketchum isn't really saying that small scale nuclear reactors, like the ones that NuScale Power is trying to build, are a dead end. He's really saying that his company needs energy solutions now and new nuclear technologies just aren't helpful in that regard because they are still in the early stages of their development. The takeaway for NuScale Power investors from all of this should probably be that NuScale Power still has a long way to go, in terms of time and money, before it is a self-sustaining company over the long term.
