Motley Fool Hidden Gems Investing - AI’s Power Problem

Starting point is 00:00:00 Which AI companies are getting a power-up? You're listening to Motley Fool Money. It is Monday, October 27th, and I am your host, Tim Byers. With me are longtime fools, Nick Seiple, who also supports our Canadian services, and Seth Jason has been covering emerging tech as long as I have, maybe longer. Both have forgotten more about power and the energy markets than I will ever know, which is why it's great to have both of you here. Today, we want to talk about a different element of the AI story, and it's all AI all the time, and it's exhausting, but we need to talk about how and where we'll get all the power

Starting point is 00:00:52 needed to make sure our soon-to-be robot overlords are serving us well so nick let's let's start you know talking about the the ai power problem here i want to see you up with this the apparently we ought to be adding 80 i i guess it's gigawatts i don't know if it's gigawatts or gigawatts i'm not i can't get any of this right but of new power generation capacity a year to keep pace with ai as well as cloud computing, crypto, industrial demand, and electrification trends. And this is according to a consulting and technology firm, ICF. That sounds big. I mean, is this doable, one? And if we do it, how do we do it? It is doable, but they say the most dangerous words in investing are, this time is different. When it comes to the U.S. power grid, the era

Starting point is 00:01:46 rendering is different than the one we've been in for the past, call it, 20 years. So, if you look from 2005 to 2020, energy consumption in the U.S. grew just 0.1%, essentially flat for the better part of two decades. There were increases in electricity demand that were offset by things like efficiency improvements, structural changes in the economy. You've heard folks talk about the U.S. shifting from a manufacturing economy to a service economy. All that has reduced the load needed on the grid over the past 20 years. Here, as we enter the decade of the 2020s, that is changing with the emergence of AI in 2020. Data centers, as a portion of the overall electricity demand for the U.S. grid, were less than 2%. Now, if you look at current estimates

Starting point is 00:02:30 out there, expected by the end of the decade to be somewhere between 9% and 12% of overall electricity demand. So, we've gone from a regime where we've kind of been treading water, maintaining the current grid, to now we've had a new load coming on from AI that we're scrambling to meet that demand. That's why you're seeing basically all hands on deck, whether it's Google signing deals for hydropower, Microsoft signing deals for renewable, reactivating existing nuclear plants, and what we'll talk about later, increasingly moving towards new small modular reactors, all trying to address the needs that are coming to the grid from AI. so seth you're my guy that i rely on for you know the reality check here so tell me how big the gap

Starting point is 00:03:16 is between what we say we're going to do with ai and bringing new ai capacity i'm sorry power capacity online to service all of this ai like how big is that question right yeah what's the cold cup of coffee here right that's the question mark if you look at what is being pledged to be built, it's probably much bigger than that 80 gigs that you said. Every week, Nick had the greatest line about this. Every week, these AI CEOs are playing the congratulations, you said, the biggest number game. I want to point out that they actually sell Doom as part of the PR they do. When they say, oh, AI is an existential threat, they're really trying to tell you that's how good their AI is. When they try to tell you that

Starting point is 00:04:00 AI is going to use up all the power, they're really trying to convince you that that's necessary now we've seen a huge increase in demand and some of these data centers really do suck an enormous amount of power compared to prior ones you're talking about even smaller ones 100 megawatts or something small compared to what they're promising using as much as entire towns used to use um and so this is really incredible and then when you look at the product we get out of it you might because you it's hard to be like do we really need like ai videos do we need to use So you might ask yourself that question. So one of the things I think we don't know and we won't know until we're kind of in the

Starting point is 00:04:41 middle of building this is how much demand there is really going to be. The reality is that electricity is really expensive, even if you cut a sweetheart deal with somebody to get it cheaper, which most of these data center companies do. But as you both know, and everybody out there listening knows, AI efficiency is also a real thing. every time nvidia comes out with a new kind of era of chips it uses a lot less energy and then there's always software and other optimizations they're doing constantly every year so what you have is basically two curves and they're kind of like kind of picture them maybe as hockey sticks

Starting point is 00:05:15 maybe not but they're kind of exponentially growing right now you don't know when they're going to flatten into s curves but where they cross over one of them is like electrical demand from ai the other one is is uh power generation that can survey we don't actually know that and so right now they're leaning heavily on to trying to get gas to do most of this because that's and that's the easiest way to get kind of a reliable base load but ge vernova they or they have like a three-year backlog four-year backlog right now and turbines and by the way they're publicly saying like we're building capacity but not that much capacity because we don't want to spend too much building capacity and overbuild capacity. We'd rather keep our fat profit margins.

Starting point is 00:05:57 Thus, everybody is saying, we've got to go back to nuclear. Yeah. GE Vernova, ticker is GEV. When you're referencing this, just to be clear, because I'm a dummy about this, when you say gas, you're talking about gas turbines. Gas turbines. There are other makers. GE Vernova is one of the premieres. If you're in the U.S., you're going to try to buy from them, because you're probably going to have to pay a heck of tariff on anything that comes from overseas yeah all right so nick we've i have heard a lot from both of you in the prep for this there is a whole boatload of discussion about nuclear so i'm going to give you another stat here apparently this is amazon saying that they have a uh a cat this is

Starting point is 00:06:41 called apparently the cascade advanced energy uh facility this is in washington and it'll be built by apparently a utility called Energy Northwest. Amazon is going to fund this. It's going to deploy 12 small modular reactors. I guess these things are called SMRs. Tell me what an SMR is. Should I care? Where are we on the nuclear spectrum here? Yeah, so small modular reactors, as the name might describe, are smaller reactors than your traditional large-scale nuclear reactors of the past. Just for context, one of these large reactors, probably about a gigawatt of electricity generation. These small modular reactors, you're looking at 300 megawatts and less. There's also microreactors that are in the 10, 20, 30, 50 megawatt range, significantly smaller

Starting point is 00:07:31 than these historical large nuclear plants. The idea with these small modular reactors is that you can manufacture the components at a centralized manufacturing hub and then ship those to the construction site and assemble them there. That saves some of the having to reinvent the wheel every time you invent one of these nuclear, every time you build one of these new large-scale nuclear plants. One of the issues that we've seen, at least with reactor construction in the U.S. going back the past 20 years, is these plants, because of the bespoke nature of them and that you're spinning up the nuclear workforce to support them each time you build one tends to run a lot longer than the original estimates for deadline and also come in significantly over

Starting point is 00:08:15 budget. The hope is, with these small modular reactors, you can get some of those costs under control, get an order book in place, and start to get some of that learning curve to bring down the cost. That's something that, if you look in other markets like China, they've been able to build nuclear reactors back-to-back-to-back using the same workforce and bring down costs over time. The U.S. hasn't had that same success. But the hope is, with these new small modular reactors, you'll be able to do that. Now, there's dozens of designs out there. And you see more of them coming public in the public markets almost every week, it seems like, in the past month or so. However, the companies that look most interesting to me are these

Starting point is 00:08:54 private companies. X Energy is one of those you talk about. That's the company supplying the small modular reactor for Amazon. Amazon's certainly supporting this, but it's actually not going to be the first of a kind deployment of the X energy reactor. The first of those is going to be with Dow Chemical in Louisiana. They have the construction permit. It is now under consideration by the Nuclear Regulatory Commission, expects to have a final decision on that by November of 2026. And if they can get that moving forward, then Amazon looks like it's going to have them an order book in place as we move into the 2030s to hopefully bring those costs down and start stamping these things out and we're looking here at like behind the meter right we're talking about

Starting point is 00:09:34 like co-locating is that one of the differences with the reactors the idea that instead of this thing being out there on on a grid or something and everybody can maybe get some of it that some of these will be stuck like next to the factory kind of like they might have their own battery backup or something kind of behind the meter right so that they have their own load uh provider right there. That's some of the story with this, right? Yeah, that's an important factor as well. You can fit these on existing sites near the data center, and you get around competing with the retail electricity customer for this electricity. That's one of the challenges of attaching these large data centers to the grid, is all of a sudden you're adding this additional

Starting point is 00:10:17 large load that is competing with you and me trying to have hot water and keep the lights on and watch Monday night football and that sort of thing. To the extent that these large tech companies can fund these reactors, have them behind the meter, have them where they actually own the power, it can potentially get around some of those conflicts. We should point out that grid hookups for data centers, the lead time on those is right now a lot longer than even getting a gas turbine. It might take you three years to get a gas turbine. It might take you five years to get a grid hookup. That's where we are right now. I want to make sure I understand this properly. The idea here is behind the meter, meaning not on the grid. That's what we're

Starting point is 00:10:58 talking about. Am I, am I hearing you right? In some cases, yeah. In some cases that won't be the case. Like, like up in Canada where they're adding to an existing nuclear plant with SMRs, those are presumably going to be like tapped into the plant, which is then feeding the grid. So this is a smaller one. Presumably you could have it behind the meter providing just for you. Okay. Already, this is incredibly complicated. There's a lot of rules around this, it sounds like.

Starting point is 00:11:30 There's also, if I've heard you correctly, there's a lot of potential configurations here as well. There's lots of things you can do with this. So talk to me a bit then. it and maybe seth i'll go to you on on this one how much do i want to believe or should i believe that nuclear is going to play a role here in in the ai build out because i have two things i've seen when what you just said is one of the things like it takes a really long time that's a thing another is that we're going to repurpose different facilities that either went dormant or didn't work

Starting point is 00:12:08 It looks like Brookfield Asset Management is doing one of those types of deals. And then we have maybe the worst thing I've ever heard in this entire setup, which is now we're going to have SPACs that are selling, I guess, the nuclear promise. One of these is a company called One Nuclear Energy, which is going to go public through SPAC. So what should I believe, Seth? well it's going to depend from from place to place i think nick is right nick whenever i communicate with him he's always got kind of the soberest and the best ones to discuss um but this

Starting point is 00:12:48 is really complex you talked about that brookfield deal that is a site which like has been kind of sitting there empty and been getting rained on for you know what is it nearly a decade so even brookfield has a has an out like if they get there they're gonna say woof we can't use what's here apparently they can get out of it. On the other hand, restarting Palisades up on the shores of Lake Michigan is a much easier lift, and they're on the way to doing that, to getting that nuclear plant restarted up there. And so, they're working on restarting some Three Mile Island capacity to, I believe it was Microsoft who did that. So, it all depends. It's really specific from case to case. And the issue is that, like Nick said, there's dozens of these SMR companies. A lot of

Starting point is 00:13:34 have super cool ideas. If you listen to what they're all saying, almost all of it sounds really good. Um, but you know, it's not nearly as simple as, as they all make it sound. And Nick has said a bunch of times, and I agree, most of these are going nowhere. A few of the better ones may get somewhere. I'm always on the side of it's going to be more expensive and take longer than people think, but I think some of it has to happen. Yeah. The VC summer reactivation Brookfield. I think it's a great illustration of, of kind of where we are in the cycle, just, uh, where we let off talking about we were in a period for multiple decades of stagnant energy demand. That coincided with the VC Summer. We talked about, as well, that many of these projects

Starting point is 00:14:16 go over budget and take longer than expected. That's really what you saw with the VC Summer program. The initial expectation was that it was going to be $9 billion to complete the entire facility. After, I think it was six years, they had reached their $9 billion milestone back in 2017, and they decided to abandon the project. Here we are in 2025, where we're looking for all hands on deck to get access to any possible type of energy capacity we can. And you see Brookfield, which owns Westinghouse, which went bankrupt after the previous project was canceled, coming back in to try to bring this facility online. And it just reflects the power needs of these AI data centers, and that we'll take any additional power that we can find. And

Starting point is 00:15:00 And that includes reactivating shuttered nuclear plants and picking up sites that had been abandoned mid-construction. It's really all hands on deck trying to meet the power demand coming down the line. And I think today, we're looking to reactivate all the sites that we can in place, keep coal and gas plants that were set to be shuttered extended to maintain that power production. But we're going to run out of that type of easy-to-access, easy-ish-to-access power capacity pretty soon. And as we move into the 2030s, that's when you really will need these small modular reactors and really new forms of energy production to come online to meet the

Starting point is 00:15:39 growing needs of AI. And that's not without even getting into, right? I mean, Jensen Wang and everybody is talking about that we're going to have humanoid robots in the 2030s. We're going to have to power those things as well. So, this is going to be a long haul towards just growing energy demand and more and more applications that are more and more power hungry. all right well up next we'll talk about some fakers and maybe even a breaker or two you're listening to motley fool money all right we're back we're gonna play some faker breaker for those who don't know how this game works it's very simple we are going to talk about three companies three companies that are either a faker or maybe resemble a rule breaker and a faker is a

Starting point is 00:16:24 company that's growing really, really fast, but unsustainably so. Or there's a ton of hype around this that, I mean, it looks real in the moment, but it's a mirage. So, three companies. You tell me, faker or breaker? Seth, I'll start with you. Oklo, ticker OKLO. Faker or breaker? What do you thing i gotta give it faker i'm ready to get some hate mail i'm sure in any of this nuclear space i want a company that is kind of knows what they're doing has been around the block already so all of these are going to come are going to ring up the cash register the wrong way for me this is i love that everybody's so excited new engineers are like hey we're two guys from mit we can you know come out and do a a new slash old type of uh nuclear reactor but uh i'll believe it when i

Starting point is 00:17:16 see it. Okay. Nick, let's move on to another one here. We're sticking in the nuclear sector. This one feels a little cheeky to me. NuScale Power has decided to co-opt the very clever ticker SMR. Faker or Breaker? Are they the leader here? I'm going to go Faker. In some ways, you could point towards NuScale as a first mover in small modular reactors. The company was founded in the early 2000s, was the first one of these small modular reactor companies to get licensed by the Nuclear Regulatory Commission in the U.S. It actually has some amount of revenue, unlike pretty much every other small modular reactor company on the public markets. That said, it's tied to a small consulting contract in Romania. New Scale's small modular reactor

Starting point is 00:18:06 design had some partners in Utah partnered with it. However, those folks pulled out back in 2023 after, surprise, estimates for the cost of what these facilities would actually come in at came in significantly higher than any of its partners were willing to spend. That said, the stock has gone up a ton since then, again, because of the hype around small modular reactors. But I don't think NuScale is significantly closer to deploying a reactor today than it was five years ago. And it's in a very, very crowded field. All right, Seth, you close us out here. nano nuclear energy ticker nne faker breaker still a faker to me it combines two my favorite things blast from the past nano um i feel like i'm back in 2005 when when nanotechnology was

Starting point is 00:18:54 a very hot topic and just about every company you looked at that had the word nano in it uh was something you needed to scream and run away from you know like nick said most of these have not much in the way of revenue, if anything. And again, I'll believe it when I see a little more proof of projects. Fair enough. I mean, what I'm hearing is that this is something that is really going to accelerate into 2030, but in 2025, maybe slow your roll just a little bit. If I was going to talk about the designs that today that I think have a chance to win, I mean, many of them aren't independently publicly traded companies, but small modular reactors, under construction in North America today. There's the BWRX 300 design being built at the Darlington

Starting point is 00:19:41 site in Canada. That is a GE Hitachi design, GE Hitachi partially owned by GE Vernova, the big gas turbine manufacturer. BWX Technologies, a company I've talked about in the past, is one of the key suppliers for building that reactor, getting a lot of support from the Canadian government. I think that's one design to look at. The other area I would look at as well are, you know, designs that are working together with the U.S. military. Last month, actually it was earlier this month, I believe, the Army announced Project Janus, which will seek to deploy small modular, excuse me, micro reactors at U.S. military bases here in the next couple of years. There were eight companies selected as potential contributors to that. And I think

Starting point is 00:20:28 those would be the companies to look at. Just to list those out, it's Antares Nuclear, BWX Technologies, General Atomics, Kairos Power, which has partnered up with Google, Oklo, which we talked about earlier with a little bit of a side eye, Radiant Industries, which actually has a reactor design under construction that will supply an Air Force base here in the coming years, Westinghouse Government Services, which is, again, that Brookfield-affiliated entity that is participating in the reconstruction of the VC summer site, and X Energy, which is, again, contracted with Amazon that we talked about earlier. Most of these companies are private, it but i think if you point if you look to what the the military is doing it can give you a give

Starting point is 00:21:05 you a uh a sign of some of these areas where we might see construction earlier than some of these i guess spacks that have come public in recent months all right up next we uh take a look at what's coming down the pike this this week lots of earnings you're listening to motley fool money all right fools it is uh it's earnings week of course it's going to be earnings week for the next few weeks so let's quickly go around the horn here before we preview tomorrow so seth an earnings report you're looking forward to this week who's reporting who do you got a couple and they're pretty different cadence sells selling the software that is used to design chips interested to see what their ticker k's cdns yep but their demand looks like and they've been

Starting point is 00:21:51 you know they've been subject of uh terror fights and new core i'm interested to see what steel demand is like and what profitability is or isn't like given their advantaged tariff situation since they're in the U.S. here. And Nucor, ticker N-U-E. Excellent. Nick, what do you got? Yeah, I'll be looking at Dexcom, ticker DXCM. They'll release their third quarter earnings results on October 30th. Dexcom, one of the leaders in continuous glucose monitoring devices in a duopoly with Abbott Labs' Freestyle Libre system. Dexcom has had a challenging last few quarters. Last year, lots of pressure from the onset of GLP-1 drugs.

Starting point is 00:22:32 This year, some execution missteps as they've transitioned from selling in the durable medical equipment channel to now selling primarily through the pharmacy channel. And then their CEO and chairman, Kevin Sayre, had to take a leave of absence last month for medical reasons. So this is a time where a solid earnings report could really reset the narrative around a business that I think has lots of growth potential in the years to come. I like it. I'm going to say Microsoft. I mean, I'm endlessly fascinated by Microsoft anyway, but I want to hear what they have to say if they're going to say anything about the open AI relationship. Probably. I mean,

Starting point is 00:23:05 maybe, maybe not. I don't know, but I just want to hear more. Plus, I'm very curious to see how much they spend. All right. For tomorrow, will the government shutdown cause more concern for investors. What are we learning from the latest earnings reports? Emily Flippen, Jason Hall and Keith Spice will walk you through on tomorrow's edition of Motley Fool Money. So please stay tuned for that. As always, people on the program may have interests in the stocks they talk about and the Motley Fool may have formal recommendations for or against. So please don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and

Starting point is 00:23:46 provided for informational purposes only. See our full advertising disclosure. Please check out our show notes. So, Seth, Nick, thanks for joining me. Our engineer today, as always, Dan Boyd, and our producer, Anand Chakraborty. For Seth Jason and Nick Seifel, I'm Tim Byers. Thank you for listening to Motley Fool Money. We'll see you next time, fools.

Motley Fool Hidden Gems Investing - AI’s Power Problem

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