MW Uranium and utilities stocks set to soar even higher as Big Tech goes nuclear
By Michael Brush
Microsoft and other tech giants including Oracle, Amazon.com, Apple and Alphabet need more electricity to energize their AI future
As an investor, I've been a nuclear energy bull since back when that was unpopular. Now, even though uranium and uranium stocks are up recently - and have soared 400%-500% since I wrote about the sector in 2017 (versus 150% for the S&P 500 SPX) - I still believe they have a lot more room to run.
Here's why: Microsoft $(MSFT)$ in Septmber signed a surprisingly generous deal with a utility to generate electricity by restarting a Three Mile Island nuclear reactor in Pennsylvania. Other tech giants including Oracle $(ORCL)$, Amazon.com $(AMZN)$ and just this week, Alphabet's Google $(GOOGL)$, also have committed to nuclear power deals.
Here's the key angle in the Microsoft deal that's getting little attention. Microsoft is paying at least 100% over market rates, according to analysis by Morgan Stanley. The price almost feels like desperation. But given the powerful electricity demand trends in store, a few years from now it may look like the tech giant got a bargain.
Microsoft's deal with Constellation Energy $(CEG)$ involves restarting the Crane Clean Energy Center nuclear plant (formerly Three Mile Island) to get electricity. The plant should come online in 2028.
Morgan Stanley stock analyst David Arcaro says Microsoft is paying about $100 per megawatt hour (MWh), a big premium over market prices of about $50 per MWh. Microsoft wants the electricity to power data centers that run artificial intelligence (AI) apps. Microsoft may be paying as much as $130 per MWh, if you include transmission charges, Arcaro wrote in a recent report.
"Microsoft has such big growth ambitions, and one of the bottlenecks is power because datacenters require so much of it," added Motley Fool energy sector analyst Matt DiLallo. "To meet their climate goals and their power goals, it makes sense to spend more to get the power that they need."
Energy demand beneficiaries
Here are the three main drivers of nuclear energy demand over the next decade or two, followed by stocks and ETFs that should benefit the most.
1. Increasing energy demand: Microsoft, Amazon.com, Alphabet and Apple $(AAPL)$ are among the tech giants hungry for electricity due to the huge power demands of data centers that run AI apps. Boston Consulting Group $(BCG)$ predicts that data-center power demand will increase 15%-20% a year to reach 16% of U.S. energy demand by 2030.
This is not the only growing source of energy demand, after 20 years of flat growth. Reshoring and growing domestic production of chips, electric vehicles, batteries and solar panels will drive energy demand as well, Sprott Asset Management CEO John Ciampaglia said in an interview.
2. Geopolitical risk: Here's another driver of increased interest in nuclear power: The need for energy security following the disruptions to supply caused by the Russia-Ukraine war.
"That shock showed how vulnerable countries are when they don't have energy security. It was the catalyst in the West to build nuclear capacity to mitigate those risks," Ciampaglia said.
3. Decarbonization: Disturbing images of severe hurricanes wiping out residential neighborhoods increases interest in going carbon-neutral.
"To help avoid some of the worst consequences of climate change, carbon-free nuclear power continues to be highlighted as a central part of the solution," Tim Gitzel, chief executive of uranium producer Cameco $(CCJ)$, told analysts on the company's most recent earnings call. He added: "The support for nuclear energy continues to emerge across governments of all stripes, energy intensive industries, and within the general public. It is driving durable demand which is unlike anything we've seen before in this industry."
Nuclear renaissance stocks
1. Nuclear powered utilities: Arcano at Morgan Stanley says the Microsoft-Constellation deal proves the value of nuclear power for hyperscalers, or big datacenter operators. He just increased his price targets dramatically for three unregulated nuclear-power utilities that may benefit: Constellation, Vistra $(VST)$ and Public Service Enterprise Group $(PEG)$.
Arcano boosted his Constellation price target to $313 from $233. He added $19 a share for the Microsoft deal, and $61 per share for future nuclear contracts. He raised his Vistra price target to $132 from $110, and his Public Service Enterprise Group to $95 from $83.
2. Infrastructure plays: Morningstar utility sector analyst Travis Miller disagrees with the bulls about the unregulated, nuclear power utilities. "The valuations in the market way overestimate the growth we think is available even in the most bullish data center demand scenario," he said in an interview. Miller has put rare one-star (out of five) ratings on Vistra and Public Service Enterprise Group.
Instead, Miller favors regulated utilities that will benefit from the need to build out the grid because of probable bottlenecks linked to electricity demand growth. He cites NiSource $(NI)$, WEC Energy Group $(WEC)$ and Duke Energy $(DUK)$. These utilities are in the U.S. Midwest and Southeast, which will see increasing energy demand linked to datacenter growth and reshoring. Regulated utilities like these are allowed to increase rates enough to earn a 9% to 10% return on investment, which should benefit their shareholders.
Morgan Stanley analyst Stephen Byrd notes that AI energy demand will lead to more restarts of shuttered nuclear plants, along with the construction of small modular reactors. This could benefit nuclear power-plant component maker BWX Technologies $(BWXT)$.
3. Uranium and uranium miners: Even as the demand for nuclear energy builds, there's a growing shortage of supply, says Sprott's Ciampaglia, who is the portfolio manager of the Sprott Physical Uranium Trust SRUUF. He cites production cuts in Kazakhstan due to shortages of sulfuric acid which is used in mining. Historically, Kazakhstan has produced 39% of the world's uranium. Other problems include cutbacks in production in Niger, and potential export restrictions from Russia, which does 40% of the world's uranium processing.
"With global uranium supply lagging behind demand, the market will likely see higher prices," Ciampaglia said. Besides the Sprott Physical Uranium Trust, these trends should support the shares of Cameco and other uranium miners - which you can get exposure to by owning the Sprott Uranium Miners ETF URNM and Sprott Junior Uranium Miners ETF URNJ.
Michael Brush is a columnist for MarketWatch. At the time of publication, Brush owned MSFT, AMZN, GOOGL and AAPL. Brush has suggested MSFT, AMZN, GOOGL and AAPL in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks
More: Google becomes the latest tech giant to strike a nuclear-power deal for AI
Plus: Tech giants desperate to power AI data centers are turning to nuclear disaster sites - despite the risks
-Michael Brush
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October 15, 2024 07:35 ET (11:35 GMT)
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