Does Soaring AI Demand Mean You Should Buy Nuclear Energy Stocks?

Artificial intelligence (AI) is affecting sectors across the business world. Perhaps none more so than electric utilities, due to the high power needs of data centers that run AI.

Stocks such as Constellation Energy have soared on this narrative shift, with shares of the utility up 634% since the start of 2022, crushing the broad market averages. Electricity for AI-fueled data centers is projected to grow by a multiple of four by 2030.

In light of these projections, investors are looking at ways to play this boom in power demand, including pure-play nuclear energy stocks such as NuScale Power (NYSE: SMR) and Oklo (NYSE: OKLO). Both stocks are up more than 300% in the past 12 months due to the optimism around the growth in electricity demand worldwide.

Are either of these stocks a buy to play the AI trend? Let's take a look.

NuScale Power: small modular reactors

NuScale Power is one of the leading start-ups trying to sell small modular nuclear reactors (SMRs). The company is betting that its smaller reactors will be more affordable to utilities, and it is the only start-up to have an SMR design approved by the Nuclear Regulatory Commission (NRC).

The company's SMR is water-cooled and built in a factory, which makes it modular and scalable, at least in theory. Proponents for the technology claim it will easily scale up because you can connect the reactors together to keep adding capacity.

The problem with NuScale is its struggle to find customers willing to use its technology. A project in Utah was recently cancelled due to huge cost overruns, which is not a good indicator for SMR viability.

The company is in the process of project planning but does not have a reactor set to debut until after 2030, and that is before considering the usual time delays that come with these infrastructure builds. No projects coming on line until after 2030 means that NuScale will not generate any significant revenue until then. That is around five years (optimistically) as a pre-revenue start-up.

The company is burning around $100 million annually in free cash flow. With around $500 million in cash on its balance sheet, it is threading the needle with its burn rate as it tries to build an unproven technology, meaning it could hit liquidity concerns at some point this decade.

This makes it a highly risky stock, which should go without saying as a company that does not generate any sales.

Image source: Getty Images.

Oklo: recyclable nuclear energy

There are a lot of similarities between Oklo and NuScale. Two key differences are Oklo's reactor design, which uses a liquid metal compound for cooling, and its aim to use recycled nuclear waste to help solve an issue for the industry. The companies are similar in using innovations to try to push disruption into the nuclear energy field.

Another key difference with Oklo is its reactor design, which has not won NRC approval. It is unclear when the company will get clearance -- if at all -- for its reactor design, putting its plans for starting up operations sometime this decade in jeopardy. Recycled nuclear reactors have been built before, but mainly in testing environments and not for commercial use.

As you may have figured out, Oklo is also a pre-revenue company and will likely not generate any sales this decade. It has only about $200 million in cash on its balance sheet, which is significantly less than NuScale, but it is going through less in free cash flow a year with a $44 million burn rate.

SMR Free Cash Flow data by YCharts.

The truth about nuclear energy start-ups

Both these stocks have appreciated in price because of the narrative shift around nuclear energy and the need to boost electricity generation to help with AI infrastructure. As mentioned above, analysts project a huge growth in electricity demand from AI by 2030. The problem for Oklo and NuScale is that neither will have working operations by then.

Electricity demand may well grow by a huge amount by 2030, but it will be met by different companies besides these two. And these stocks now trade at grossly irrational prices compared to any sort of financial projections you may have about them. Oklo has a market capitalization of $7 billion, and NuScale Power is close to $10 billion. Remember: Neither of these companies generate revenue, let alone a profit.

These stocks are simply castles built in the air without solid business fundamentals. The truth is that investors should avoid them right now.

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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy. The Motley Fool recommends NuScale Power. The Motley Fool has a disclosure policy.