Upper Deck Options

Upper Deck Research: NuScale Power (SMR) is a Strong Buy

Date: January 23, 2024

Analyst: Joshua Enomoto

Although political and ideological winds have pushed the broader energy ecosystem to integrate net-zero protocols, balancing the consumption needs of a growing global population with what renewable energy sources can actually provide is becoming extraordinarily difficult. In this regard, nuclear power has long offered a viable solution thanks to its gargantuan energy density.

Of course, there’s a major problem: the nuclear energy industry carries controversies for patently obvious reasons. Fortunately, the capitals have offered up a potentially groundbreaking solution.

Enter NuScale Power. A rising star in the energy realm, it’s poised to rewrite the nuclear narrative with small modular reactors (SMRs). Unlike the traditional nuclear powerplant, SMRs can deliver clean, reliable energy on a much smaller scale, offering unparalleled flexibility and adaptability.

To be sure, NuScale is a highly risky enterprise, having lost almost 78% of equity value in the past 52 weeks as of this writing. Still, recent momentum has been picking up, suggesting that the company is a heavily de-risked opportunity. For patient speculators, this may be your ticket to significant returns.

Understanding NuScale and SMRs

Before diving into the compelling investment case for NuScale, let’s first clarify what sets them apart. NuScale is a company developing a revolutionary type of small modular reactor (SMR). Unlike traditional large-scale nuclear power plants, SMRs are significantly smaller, with individual modules generating around 77 MWe (gross) of electricity. This modularity offers several advantages over traditional nuclear:

• Scalability: SMRs can be deployed in increments, adding modules as needed to match specific energy demands, making them ideal for smaller grids or remote locations.
• Flexibility: Their compact size allows for easier transportation and siting options, opening up the door to diverse applications from urban centers to industrial facilities.
• Enhanced Safety: SMR designs often incorporate inherent passive safety features, requiring less reliance on complex systems and potentially reducing accident risks.
• Lower Investment Costs: SMRs can be manufactured in factory settings, potentially leading to cost savings compared to the custom construction of traditional reactors.

An Exciting Potential Opportunity Ahead

Investment Thesis: We issue a Strong Buy rating on NuScale Power (NYSE:SMR) due to its unique positioning in the burgeoning SMR market, combined with two potent tailwinds: the global uranium supply crunch and the accelerating electric vehicle (EV) revolution.

Uranium Pinch Drives Reactor Renaissance: The recent production shortfalls from Kazakhstan, the world’s leading uranium producer, have thrown the nuclear fuel market into disarray. Existing reactors face rising fuel costs and potential supply disruptions, while new nuclear projects stall due to uranium uncertainty. This creates a golden opportunity for SMRs, which may require less uranium per unit of energy generated compared to traditional reactors. NuScale’s design specifically optimizes fuel efficiency, further amplifying its advantage in this environment.

EVs Spark Nuclear Energy Upsurge: While renewables capture most headlines, they struggle to provide reliable baseload power essential for a future dominated by EVs. Grid integration issues and weather dependence raise serious concerns about their ability to meet surging energy demands. Nuclear power, with its unwavering output and minimal carbon footprint, stands as the ideal partner for renewables in an EV-heavy future. NuScale’s flexible, scalable SMRs can be strategically deployed near population centers, seamlessly integrating with existing grids and providing reliable power for EV charging infrastructure.

Geopolitical Considerations: Beyond resource scarcity and decarbonization goals, geopolitical tensions add another compelling dimension to SMRs. The diversification of nuclear fuel sources through domestic SMR deployments reduces dependence on politically unstable regions like Kazakhstan and strengthens energy security for countries like the US. NuScale’s US-based manufacturing and advanced fuel utilization further enhance this aspect of national security.

NuScale’s Competitive Edge

Beyond these macro trends, NuScale boasts several differentiating factors:

• Proven Technology: Built upon established light-water reactor technology, NuScale’s modules benefit from decades of operational experience and rigorous safety testing.
• Enhanced Safety: Inherent passive safety features minimize reliance on complex systems, reducing accident risks and operational costs.
• Scalability and Flexibility: Module-based design allows for tailored deployments, making NuScale ideal for diverse applications, from remote communities to industrial complexes.
• First-Mover Advantage: With VOYGR-12 construction underway in Idaho and regulatory approvals secured, NuScale is poised to become the first mover in the commercial SMR space, capturing early market share and establishing industry leadership.

Speculative Statistics

As of this writing, SMR stock features a short interest of 26.42% of its float and a short interest ratio of 6.89 days to cover. Basically, what these stats mean is that of the number of shares publicly available, 26.42% have been earmarked for short-selling activities. Further, it will take almost 7 sessions (i.e. business days) to unwind all short positions against NuScale.

Below is the basic outline of a short trade:

• Borrowing Shares: To initiate a bearish trade against SMR stock – that is, to profit from its decline in the market – the trader must first borrow shares of SMR from a broker.
• Immediate Sell: After receiving the borrowed shares, the bearish trader sells the shares immediately in the open market. That’s because the trader anticipates that SMR (in this case) will fall, allowing him/her to pick up the borrowed shares at a lower price.
• Return and Profit: Should all go to plan, the bearish trader returns the borrowed shares back to the broker and pockets the difference.

However, if the target stock rises in value instead of falls, the bearish trader would have to buy back the borrowed securities at a higher price. That could lead to a significant loss because remember – the short trader is contractually obligated to return the borrowed shares back to the broker.

Since there’s no upside limit to a stock’s price, a lot of damage can be done. Therefore, short traders often choose to cut their losses early before circumstances become truly out of hand.

Also, options flow data from Fintel – which exclusively filters for big block trades likely made by institutions – reveals that there are two open sold calls:

• SMR May 17 ’24 13.00 Call (total premium received of $17,240)
• SMR Jan 17 ’25 25.00 Call (total premium received of $65,000)

To be fair, it’s unlikely that SMR stock will get anywhere close to the strike prices of $13 and $25. However, cynically favorable dynamics in the uranium market could drive NuScale shares higher in a hurry. That may force bearish options traders to rethink their pessimistic assessments.

Finally, TipRanks shows that analysts rate SMR stock a moderate buy with an average price target of $8, implying almost 242% upside from the time of writing.

Risks and Challenges

Despite the compelling outlook, investors should consider potential risks:

• Regulatory Unclarity: SMR regulatory frameworks are still evolving in some countries, which could delay project timelines.
• Public Perception: While public sentiment towards nuclear energy is improving, overcoming lingering concerns remains crucial for widespread adoption.
• Execution Risk: Successfully delivering VOYGR-12 on time and within budget is critical for maintaining investor confidence.

Conclusion

Overall, we believe NuScale Power is uniquely positioned to capitalize on the confluence of the uranium supply crunch, the EV revolution, and growing concerns about geopolitical energy security. Their innovative SMR technology offers a compelling solution for clean, reliable energy in a future increasingly dependent on electric vehicles and mindful of national security interests. We initiate a Strong Buy rating on SMR stock, expecting significant upside potential as the company executes its ambitious plans and the SMR market gains momentum.

Disclaimer: The author is long SMR. This report is for informational purposes only and should not be considered investment advice. Please consult with a qualified financial advisor before making any investment decisions. Additionally, this content was mostly created by artificial intelligence. While reasonable care was taken regarding accuracy, it’s vital that the reader conduct due diligence.