Two of the most controversial subjects in the capital markets are currently special purpose acquisition companies (SPACs) and nuclear power facilities. NuScale Power (SMR) commands a unique position in that the enterprise combines both concepts under one umbrella. Nevertheless, look beyond the initial points of hesitation, and you may see a worthwhile investment opportunity. I am bullish on SMR stock.
To quickly recap, NuScale entered the public market via a reverse merger with a SPAC, in this case, Spring Valley Acquisition Corp. Such entities, also known as shell companies or blank-check firms, have no underlying operations of their own. Instead, their purpose is to launch an initial public offering (IPO) in the hopes of combining with a promising private enterprise.
On paper, SPACs represent a win-win: the shell company attaches itself to a real business while the target enterprise enjoys a backdoor pathway to the public market. In reality, SPACs have proven to be problematic – particularly for retail investors – as they tend to be dilutive due to the issuance of warrants. Not surprisingly, companies that went public via SPAC mergers have greatly underperformed the benchmark S&P 500 index.
Still, it’s possible that SMR stock could join the ranks of the very few positive outliers in this space. True, NuScale represents a nuclear power facility, an industry that sparks public fear due to incidents like Three Mile Island, Chornobyl, and Fukushima. However, NuScale’s pioneering of a fresh iteration – called small modular reactors or SMRs – may help shift perceptions and energy paradigms.
NuScale Power Stock Analysis
On TipRanks, SMR has a 9 out of 10 on the Smart Score rating. This indicates solid potential for the stock to outperform the broader market.
The Compelling Narrative Behind SMR Stock
The Office of Nuclear Energy bluntly stated that the namesake platform is America’s workhorse. It comes down to the science of capacity factor, or the ability to produce maximum power within a given period (usually one year). For nuclear-based facilities, the capacity factor is 92.5%, meaning that for most of the year, nuclear energy keeps churning out power while requiring minimal downtime.
Nothing else comes close. In second place is geothermal energy, which features a capacity factor of 74.3%. From there, the comparisons dwindle conspicuously. Natural gas, hydropower, coal, and the renewable energy sources of wind and solar feature capacity factors of 56.6%, 41.5%, 40.2%, 35.4%, and 24.9%, respectively.
Add in the devastating impact of Russia’s war in Ukraine and the subsequent shelving of much of global energy supplies due to tit-for-tat geopolitical retaliation, and nuclear power becomes more relevant and compelling.
However, the benefit to SMR stock is the underlying SMR technology. Smaller than conventional nuclear power plants, these modular reactors can be integrated into places where traditional nuclear energy facilities cannot. Further, their smaller footprint potentially enables more effective cost structures while presenting scalable solutions.
Most importantly, this groundbreaking platform features a superior safety profile as smaller reactors translate to less heat needing to be dissipated in case of emergencies. More nuclear-power facilities may also help practically empower costly initiatives such as desalination (converting ocean water into potable or drinkable water).
NuScale Power is Aspirational
While the narrative for SMR stock is incredibly enticing, it’s mostly that – a narrative so far. Fiscally, NuScale has an uphill battle awaiting it, meaning that prospective investors will require faith that the business will eventually pan out.
For instance, in its latest earnings report for the first quarter of 2022, NuScale reported revenue of $2.45 million, representing a year-over-year lift of 268%. While the percentage gain is impressive, the nominal tally is quite small for an energy firm. Further, NuScale suffered a net loss of $23.4 million, which expanded from a net loss of $22.7 million in Q1 2021.
It’s also worth mentioning that the company’s operating cash flow was in the red by $33.2 million in Q1 2022, worsening conspicuously from nearly $30 million in the hole for the year-ago quarter. Again, an investment in SMR stock requires prospective buyers to look at what might be, not what is.
In fairness, SMRs also feature disadvantages. One of the most ironic is that integrating modular reactors in multiple areas – that is, to decentralize nuclear power effectively – also creates massive security risks such as terrorism. Therefore, investors will need to think carefully before plunking down their hard-earned money.
Wall Street’s Take on SMR Stock
Turning to Wall Street, SMR is a Moderate Buy based on one Buy rating assigned in the past three months. The NuScale Power price target is $15.00, implying 24.9% upside potential. The rating comes from analyst Marc Bianchi of Cowen & Co, who initiated coverage two months ago.
Looking to the Future: Promising Technology but Unproven
To be completely forthright, SMR stock represents a difficult proposition. While the underlying energy innovation is compelling, it’s also unproven economically and practically. Pioneering solutions can work out, but they can also fail spectacularly.
At the same time, Russia changed the broader energy equation with its invasion of Ukraine. Since countries cannot entirely depend on renewable sources to help make up for the shortfall, new nuclear technologies may come into focus soon, thus benefitting SMR stock.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
