Electricity demand is rising rapidly in the United States. Growth in spending on data centers related to artificial intelligence (AI) is causing electricity usage in the country to rise at the fastest rate in decades, with projections for sustained growth in the 2030s, thanks to the adoption of electric modes of transportation making significant inroads in market share in the industry.
Electrification is going to be a long-term trend around the world, and the party is just getting started. Countries and municipalities are searching for alternatives to fossil fuels to help match electricity supply with this growing demand.
One company that hopes to ride this wave is NuScale Power (SMR -0.41%), a start-up focused on small modular nuclear reactors (SMRs). It went public a few years ago and now has a market cap approaching $5 billion as investors get optimistic about potential growth in nuclear energy.
Can NuScale Power stock make you rich if you buy today and hold for decades?
Rising costs and project cancellations
While demand is rising for electricity, so are the proposed costs for NuScale Power’s projects. In late 2023, due to rising cost concerns, the Utah power regulator terminated its deal with the company to build SMRs to supply its power grid.
Originally, the project was set to debut in 2023 at a cost of $3 billion. However, years later, the projected cost swelled to nearly $10 billion and a completion date no sooner than 2030. Utah’s government decided to look elsewhere to supply its utility needs.
The cost to build power plants directly affects what businesses and households will pay for electricity, making it the No. 1 factor when deciding which energy source to use. If SMRs are going to be significantly higher in cost than traditional sources, nuclear power may not be the first choice for utilities when deciding how they will source electricity for their customers.
This brings up another point around SMR technology: It has never been deployed commercially outside of Russia and China, which each having only one SMR in operation. Technology advocates have hyped SMRs for decades, but they have struggled to meet the underlying economic reality of how utilities operate.
No operations before 2030
Despite concerns over costs, NuScale is pushing through with some existing projects with hopes that costs will come down with increasing scale and efficiencies. However, none of its projects are set to become operational until the early 2030s, when it says it will be ready to deploy a 12-reactor set-up for commercial customers.
That is at least five years (likely longer if historical delays are any indication) before the company is generating significant revenue and can bring products to market. AI data center builders need electric power today.
The next five years are a prime opportunity for electricity providers to take advantage of the rapid growth of demand in the United States. NuScale is going to miss the boat as its projects get delayed again and again.
Cash burn and diluting shareholders
NuScale, arguably, resembles a research project more than a practical business venture. It’s more a start-up than a public company.
To maintain a cash position for its research and overhead costs, the company is consistently diluting shareholders with new share issuances and warrant conversions. This is bringing cash to the balance sheet but raising the number of shares outstanding, which are up close to 200% since the stock started trading publicly.
SMR Shares Outstanding data by YCharts.
The company is burning over $100 million in free cash flow a year, which will keep being a drag on its finances since it will not have any opportunity to generate revenue from SMR technology for many years. Cash burn will likely increase, too, if it has to start actually manufacturing its reactors for customers sometime down the line.
With $447 million in cash on the balance sheet, you might think that NuScale has a war chest to get through its research phase. But that idea is simplistic, considering the time needed to bring SMRs to market. And this is taking its current planned proposals at face value for a company that has consistently delayed when it expects its technology to actually be ready.
You don’t invest in science projects when building a stock portfolio. You invest in strong businesses that generate positive free cash flow. NuScale Power is one stock for investors to stay far away from today.