Is NuScale Power a buy after recent volatility?

Key Points

• NuScale Power is a money losing nuclear power upstart.

• The company is working to build small scale modular nuclear reactors.

• NuScale Power is making solid progress, but there is still a lot of uncertainty to consider.

• 10 stocks we like better than NuScale Power ›

Shares of NuScale Power (NYSE: SMR) have been as low as roughly $7 a share over the past 52 weeks. They have risen as high as $51 or so. And in between those two extremes there was a nearly 58% drawdown, even though the stock is up a whopping 400% over the past year.

That's a lot of volatility! Clearly this stock is only appropriate for more aggressive investors, but is it a buy today for even that group?

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Here's some facts to consider.

Image source: Getty Images.

What does NuScale Power do?

Most of NuScale Power's revenues today come from consulting work for Fluor, a large construction company. Fluor also happens to be a large investor in NuScale Power. The consultation services that NuScale is offering relate to a project being considered by RoPower, a Romanian power company. And this all ties back to NuScale because RoPower is lined up to be the first customer for NuScale Power's small modular nuclear reactors (SMRs).

Manufacturing SMRs is what NuScale Power is really attempting to do. It is an interesting technology that would, effectively, take existing nuclear power plant technology and scale it down.

It's a huge opportunity. SMRs would be made in a factory setting, making them easier and less expensive to build. Moreover, they would incorporate the most modern safety approaches, reducing risk. And they would be small enough to be easily moved around and placed where they were needed, including relatively close to population centers. SMRs could be a game changer for nuclear power.

And this opportunity is hitting at roughly the same time as a massive uptick in demand for electricity. In the U.S. alone, electricity demand is expected to increase 55% between 2020 and 2040. That number doesn't do this shift justice. You need to compare that 55% jump to the fact that demand only rose 9% between 2000 and 2020. This is a huge change and SMRs could easily be a big part of meeting this growing demand.

SMR data by YCharts

Why is NuScale so volatile?

That's the story behind NuScale Power, and it is a good one. But Wall Street has a bad habit of getting a story in its teeth and running with it to the point where the story looks like it can never live up to the stock price. Given the huge rise in NuScale Power's shares, that seems like it may be the case here. And that big 58% drawdown shows how quickly investor sentiment can turn if there's a change in Wall Street's perception of a stock like NuScale.

The problem here is that NuScale is losing money and it will likely continue losing money for years to come. It is really just building out its business at this point. To highlight that point, RoPower is lined up to be its first customer but it isn't actually a customer just yet. If RoPower decides not to use NuScale Power's SMRs then NuScale's stock would likely crater.

Even if RoPower gives the project the green light, NuScale Power still has to build commercial SMRs. It hasn't actually done that at any scale just yet, so going from zero production to supplying RoPower with six units in a timely fashion is a pretty important test. If NuScale fails the test its shares are, you guessed it, likely to crater.

To be fair, inking the first customer is likely to be an important step that will lead to additional customers. But there is a lot up in the air right now even though there is a lot of opportunity. The problem for investors is that the huge price advance in NuScale Power seems to be pricing in a lot of good news that may or may not come to pass.

NuScale Power is not appropriate for most investors

All in, NuScale Power is likely to interest a very small number of investors at this point. First, you need to be willing to take an aggressive investment approach. Second, you need to believe, strongly, that the best case outcome is going to be the outcome. And, third, you probably need to be willing to invest for a long time period, given the massive price advance over the past year. In other words, the volatility here suggests that most investors will be better off watching from afar.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends NuScale Power. The Motley Fool has a disclosure policy.