Two Ways to Profit From Nuclear's AI Infusion
And You'll Avoid the "Nuclear Fever" That's Infected the Markets With Risk ...
We have a “power problem” here in America.
And it’s a problem without a simple solution.
The “Artificial Intelligence (AI) Era” is certainly a key catalyst for this problem — and it’s the one most folks are obsessing over.
But it’s just “part” of the issue – and possible crisis — we’ll soon be facing.
After decades of pretty stable electricity demand, we’re careening into an era where power demand is going to skyrocket – an era where we lack the generating capacity or the grid to support it.
The United States is already home to about 5,000 so-called “data centers” — in essence, warehouse-sized computers used to process, organize, store and protect the masses of data that you, me and all the companies around the world create every second of every day.
That’s a full third of all the data centers that exist in the world. And it’s the biggest concentration on the planet.
Trouble is, it’s not enough.
AI’S SPARK OF LIFE
According to the International Energy Agency (IEA), AI-focused data centers slurped up 4% of generated electricity two years ago. That’s projected to hit 6% in 2026 – and as much as 12% by the end of the decade, says investment bank Barclay’s PLC.
We could see $1 trillion worth of data centers built in the next 60 months.
If that were the only challenge, it would still be one heck of a challenge.
But it’s not.
America has an aging power grid – one not set up for the rigors of this new demand … and certainly not one to handle the rigors of extreme weather and the “bad actors” that are already digitally hammering such “critical infrastructure” elements like our water systems.
And all the generation that’ll be needed to supply the new demand comes amid pressure to make sure these additional power sources are “green” … renewable.
And the single-most-reliable power-generation technology we have right now is nuclear.
Big Tech – the progenitors of all that data-center growth — know this. As I told you in our recent report “Going Nuclear: AI’s New Power Partner,” firms like Microsoft Corp. MSFT 0.00%↑ , Alphabet Inc. GOOGL 0.00%↑ and Amazon.com Inc. AMZN 0.00%↑ are inking new power-generation deals – many of them nuclear-flavored.
And that’s created a kind of “nuclear-fever” — a gold-rush-like bullishness that’s fueled a big run in a lot of stocks.
But it’s also created a lot of risk.
Nuclear power is speculative in the near-term. Regulatory issues, safety worries and bad-news “events” have short-circuited past cycles.
But it’s probably the one technology that’s ready to be scaled right now. New, innovative “modular reactors” — smaller in size and more uniform than the “each reactor is unique” issue that plagued the industry during its 1970s ramp-up – could be the answer.
But lead times, regulatory challenges, safety concerns and public sentiment remain obstacles. That means “pure-play” nuclear stocks won’t pay off tomorrow — despite what surging share prices seem to say.
And that means you need to play the long game.
In a nifty story of his own, Avi Salzman, a senior writer for Barron’s, pretty much repeated what I told you in our last report.
“Until these new plants get off the ground, the trade should be considered speculative,” he wrote a week ago. “Other U.S. nuclear ‘renaissances’ have petered out because of costs or safety concerns. But with Big Tech and government joining forces, this one is looking more likely by the day.”
In that last report, I promised I’d circle back with a couple of nuclear stocks to look at.
I’ve got two for you here today.
Consider this to be the first of several of this ilk.
STEADY EDDIE/STEADY STATE
When it comes to nuclear power and AI, The Southern Co. SO 0.00%↑ is an obvious candidate for Wealth Builders.
I referred to it as a “Steady Eddie” stock. But since we’re talking about power-generation – electricity from nuclear energy … in other words, physics – maybe “Steady State” would be a more-apt moniker.
It’s a company I know well. In fact, coming of the Crash of ’87, this was the first stock I ever bought. And I still own some of it.
The Atlanta-based utility serves customers in Alabama, Florida, its home market of Georgia and Mississippi. And it plays into some of the longer-term storylines — like renewables — that will only get stronger.
More than half its power-generation — about 54% — stems from natural gas. But from that same power-generation standpoint, Southern is actually an interesting “proxy” for U.S. nuclear energy: About 18% of the electricity Southern generates stems from nuclear — which is pretty much in line with the U.S. Energy Information Administration’s 18.6% estimate for all of America.
Here’s a breakdown of Southern Co.’s power-generation sources:
The utility’s nuclear capacity will only increase. Southern recently said units No. 3 and No. 4 of its Vogtle nuclear business are now operational. Not only is that the first completion of a U.S. nuclear plant in decades; Vogtle is now the biggest nuclear plant clean-energy site here in America, says a new report by Zacks Investment Research.
At a recent price of $93, the yearly dividend of $2.88 a share equates to a yield of 3.1%. Thanks to its recent dividend increase, Southern has now boosted its payout for 23 years straight years.
Growing energy demand – in part from AI — will rev up earnings. From earnings per share of $3.65 last year, analysts are forecasting increases to $4.02 this year and $4.32 in 2025, says Investor’s Business Daily MarketSurge.
Now, I will say that Southern’s valuation — a P/E of more than 22 —is above its historical norm.
That means you can wait for a pullback … buy now with a super-long-term time frame … or embrace my “Accumulate” strategy, where you buy some here — and add to it on pullbacks or as you get extra cash.
NEW COMPANY/OLD LINEAGE
My Dad, William Patalon Jr., was a career engineer who worked for more than 50 years. Most of that span was in the defense/aerospace sector. But he also spent time with Westinghouse Electric Co.’s commercial-nuclear business near Pittsburgh. In those days, there were two big U.S. players in the commercial-reactor business: Westinghouse and General Electric Co. GE 0.00%↑.
The Westinghouse unit is now part of another company.
In 2007, GE combined its business with Hitachi of Japan. Parts of that GE stake (I’ll spare you all the corporate dance-steps that got us here) are now part of GE Vernova Inc. GEV 0.00%↑, formed early this year by the merger and subsequent spinoffs of General Electric’s energy businesses.
GE Vernova is the second company we’ll focus on today.
It’s now an $82 billion (market value) global unit that operates in the power, wind and electrification sectors. The first and the last are relevant to our talk here today.
The power unit works on gas, hydro, steam and nuclear power technologies. Electrification focuses on getting electricity from the power plant to the user. And it also focuses on power “storage” — an important opportunity going forward.
In a recent interview with The Wall Street Journal, GE Vernova CEO Scott Strazik also agreed with what I told you in that last report — that nuclear power is a viable energy source, but one that will take time to build out.
“I do think in the early 2030s this will start to scale,” he told the newspaper. “We’re going to be adding gigawatts upon gigawatts of nuclear capacity every year. So it’s going to take this decade to really validate the technology, get a few of the first projects cut into COD, or commercial operation date. And I’m highly confident in the 2030s this is going to be a very material part of the equation for us.”
Now, just because Strazik talks about “the early 2030s,” that doesn’t mean the company does no business until then. It’s work with the grid will be crucial. New powerplants and new data centers will be built over time, meaning there will be revenue all along the way. And GE Vernova’s breadth of business – and its global reach (only 30% of its business is U.S.-based) – work in its favor.
Indeed, Raymond James Managing Director Pavel Molchanov referred to it as a power-industry “supermarket” that markets electricity-generating natural-gas turbines, services and modernizes power grids and even makes and sells wind turbines.
“This company does everything,” he told Yahoo! Finance. “Because of the buildout of electric-power infrastructure is an all-of-the-above story, that means all these solutions are going to be needed.”
The outlooks for the company are all over the place: Target prices range from a low of $195 to a peak of $397.
Morgan Stanley analyst Andrew Percoco recently reiterated his “Overweight” rating and boosted his “bull case” target from $371 to $397.
The shares closed Thursday at $297.
Right now, earnings are projected to grow at an average annual rate of 21% over the next five years. That means earnings would double in about 3.5 years. And, all else being equal, as share prices tend to follow earnings, you get an idea of the magnitude potential GE Vernova offers investors.
That said, the stock was trading at about $140 back in April — meaning it’s more than doubled in a very short stretch. That makes it a bit risky.
It’s a stock you’d want to look to buy on a pullback – or might want to “Accumulate” over time.
That really says it all: Because of “AI/Nuclear-Power Fever,” you’d really be “chasing” stocks right now.
Wealth Builders don’t chase.
They’re patient. They wait. They look for opportunities … whether that means “shopping on sale,” or building a position over time.
The opportunity here is with AI, a growing power appetite and an electrical grid badly in need of modernization.
But you’ve got time.
And I’ll tell you about all of the opportunities.
See you next time;
