Motley Fool Hidden Gems Investing - Nuclear Energy Gets a Big Government Boost (Again)

Starting point is 00:00:00 Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Matt Frankel and John Quast. Nuclear's been in the news lately, and so we're going to be diving into some recent announcements related to federal government incentives at getting into the nuclear industry and trying to drive that further. We're also going to take some listener questions related to the energy space as well.

Starting point is 00:00:34 But there's a lot of headline news going on these days. Not like giant earth-shattering news, but a nice smorgasbord of news stories today. We had the micron earnings recently. And what we want to do is just kind of do a quick round the room of stories that we saw that were kind of interesting and why you think they matter.

Starting point is 00:00:52 John, I want to start with you. What did you see recently where you're like, huh, that was interesting. Well, yesterday, Qualcomm had its Investor Day presentation. Qualcomm, of course, a huge semiconductor company. And the thing that stood out to me was it's launching a data center platform. Now, Qualcomm is known as more of a mobile device player. It's Snapdragon chips are in a lot of mobile devices, and that's really where its bread and butter is, but saying that it's launching a data center platform now and it's targeting about $15 billion in revenue by 2029. And for perspective, the company has about $45

Starting point is 00:01:32 billion in total trailing 12-month revenue right now. So adding $15 billion to that top line number is pretty significant. And I think what stands out to me is for investors, a lot of investors are starting to question, where are we in this AI infrastructure build-out? Is it too late when it comes to data centers? And Qualcomm is a $200 billion company and just now throwing its name in the ring as a contender in this space, just now getting in. So to me, that's a strong signal that maybe this AI data center build-out still has a lot of legs to it because a huge player just jumped into the game. Certainly with so many of these semiconductor industry companies with market cap's now north of a trillion dollars 200 billion it's kind of almost sounds puny by

Starting point is 00:02:21 comparison so one of the questions i immediately had when you know we were discussing this pre-show was does qualcomm have the production capacity support this or is it just shifting sales from one place to another you know we've seen story like micron says they're almost sold out for a couple years taiwan semi says they're sold out uh apple's raising prices on their products just because of high memory costs and semiconductor costs. I'm wondering if this is a lot of companies saying, we're getting into data centers with chips, but getting production lines up and running

Starting point is 00:02:53 takes quite a bit of time. Yeah, it does. I should have said in my opening statement here is that one of the reasons why Qualcomm believes it's not too late is because it really sees this agentic AI trend really just starting to inflect now. And AI agents, basically they can make

Starting point is 00:03:11 50 to 100 times as many inference requests as a human that's kind of your big headline number which means a lot more cpus are needed now than what were needed before to make all this run so there's really kind of a cpu bottleneck going on maybe uh it's already been talked about a lot but qualcomm here jumping into this ring with its data center cpu the dragonfly c1000 and announcing that meta already signing up to be a customer of this product so i think that's significant. That said, this particular data center product isn't supposed to reach production until 2028. And so that's a little bit out into the future there. Now, that's not carrying the entire $15 billion target revenue number on its own, but it will play a part of that. So 2028 is

Starting point is 00:03:59 kind of the target number for getting that thing off the ground. Now, you look at players like Taiwan Semiconductor. This is a huge partner of Qualcomm. It's saying that it's kind of constrained until at least 2027. So maybe there's a path where supply and demand start to balance out a little bit by the time Qualcomm is wanting to ramp this particular product. Of course, Qualcomm does have a good relationship there.

Starting point is 00:04:22 But I think kind of the other things here to keep in mind is that there are some rumors that Qualcomm and others are actually exploring Samsung foundry because Taiwan Semi can't meet all the demand that there is. And so maybe there's some ways that Qualcomm can get around some of these supply constraints and still meet its production goals. Everywhere we go, there's a bottleneck somewhere. Matt, what is on your mind today?

Starting point is 00:04:49 Yeah, so in addition to all the bottlenecks we're seeing everywhere, we're also seeing chip making reach kind of its physical limitations. There's only so small you can make, you know, semiconductor components. And IBM just had some really significant news. I know you correctly mentioned before we were recording that, you know, IBM isn't the name you normally associate with cutting edge chip technology, but maybe it should be. IBM announced that the world's first sub one nanometer chip technology. This is a big deal for the chip industry if it ends up actually reaching the commercial phase. But the chip uses a new what

Starting point is 00:05:25 they call the nanostack architecture. What it does is instead of making everything on one layer, it vertically stacks and staggers transistors, which gives roughly two times the density of IBM's previous chip architecture. So it's expected to result not only in 50% higher performance, but 70% greater efficiency than current chip technology, which could be a big deal, especially considering the power bottlenecks that you're seeing in the data center infrastructure build out. So just for scale, their architecture precisely is 0.7 nanometers. That is roughly one ten thousandth of the size of a human red blood cell. That's how small these transistors are. And it's really it's quite an accomplishment. Sounds like it's going to be one of those

Starting point is 00:06:08 breakthroughs. And it almost really follows like the Moore's law thing where our density and capacity sort of doubles every few years or so. One of the things that you're thinking about is obviously IBM, not a foundry, doesn't make their own chips. They license a lot of what they do. And so when we're thinking about as this a needle moving sort of thing for IBM or the industry writ large, how would this kind of stack up to the competition? And obviously this is relatively new news. Is this something we could foresee actually impacting IBM relatively soon? Or is this like maybe a few years we'll see something here? Well, yeah. So to be clear, this is still at the research level. This is IBM's research division that made this announcement, not like a product team or something like that. It is a big milestone, but IBM is specifically calling out commercial production within five years. So, you know, there's still a little ways off. And like you said correctly, IBM licenses its chip design technology. It could ultimately result in a pretty big revenue stream for the company. But this is also how it makes its own like server chips and things like that without doing it in-house like Samsung, Global Foundries, or a couple of the companies that it uses. Just to compare this to something like NVIDIA, NVIDIA's most advanced chips have about a

Starting point is 00:07:20 1.6 nanometer architecture. So it's significantly smaller. The power consumption in my mind is really the big story because, you know, at a time when new data centers are seeing power delays left and right, and there's a four to six backlog of being able to connect to the grid to get enough power for these, something that's 70% more energy efficient could be a big deal. Well, speaking of power, you set up the transition really well here. After the break, we're actually going to talk about some of the things that may be powering some of those future data centers with some big government money being thrown at

Starting point is 00:07:52 it. And that's nuclear coming up after the break. Stop wasting your nights on a mattress that doesn't get you experience the most comfortable mattress in the world the sleep number smart bed at the touch of a button you can personalize your comfort choose firmer or softer adjust cooler to warmer and right now save up to 2500 during our massive labor day event hurry into your local sleep number store today because we have your number nuclear power has been in the spotlight for well over a year now between new age nuclear technology stocks coming to market, venture capital throwing gobs of money at some of these contexts. And the federal government is now setting goals of expanding nuclear energy for the first time in I can't remember how long.

Starting point is 00:08:49 So just about every company somewhat related to nuclear power have seen their stocks surge on investor enthusiasm in this particular space. And there was even more reason to cheer because the federal government made a new announcement for a loan program that could actually accelerate a lot of this development. Now, I've been somewhat dubious of the prospects of this for few reasons, but between this recent announcement and some of the other prior deals, the numbers are really starting to stack up and become overwhelmingly in favor of more nuclear. John, can you run us through the details of this new loan program? Because it is pretty exciting. Yeah, I think from a high level, the Trump administration doesn't want to play second

Starting point is 00:09:32 fiddle to anybody when it comes to nuclear. And so there is a lot of push from the top here in the country to make this a reality. And to set the stage a little bit, there is geopolitical pressure here because there are reports that China actually has more nuclear facilities under construction right now than any other country in the world. So that certainly doesn't sit well with the Trump administration. May of last year, Trump signed an executive order to get some of these newer programs out of the test phase. And really interesting, last month, Antares Nuclear, its Mark Zero reactor reached criticality. And that has not happened in 40 years for a new reactor of this kind to reach that milestone. So it is making significant progress. And

Starting point is 00:10:21 Now, more recently here, the $17 billion loan that you point out, essentially, it's low cost of capital for these companies that want to make a reactor or bring it to life. The Trump administration wants 10 big nuclear reactors by 2030, and I think that that's a really important thing to point out. A lot of these small startup nuclear stocks that we're seeing, they're pursuing microreactor. That's a different ballgame than what the Trump administration is pushing for, these very large nuclear sites looking to fund 10 of these five different projects. And so, yeah, when it comes to these things, I mean, the Westinghouse AP1000 reactor is really your only viable option for that. I believe it's the only licensed option, and that parent company is Cameco, ticker symbol CCJ. So that's kind of what's happening here. To make this happen, there has to be the money, and the government is saying, we'll give you the money if you can make it happen. Yeah, Westinghouse, it's a 50-50 between Cameco and one of the... I know it's in the Brookfield wider universe of companies.

Starting point is 00:11:28 It's probably a little bit in the renewable business, a little bit in the asset management. It's kind of spread all over the place. Like you said, this is like the big ones we're talking, you know, an AP1000 will basically like power a midsize city or, you know, based on like the announcement we saw from Chevron with that 2.3 gigawatt, you know, facility, it can run like half a very large data center. Again, it talks to how big this kind of power opportunity that we have here and the demand that we're seeing from AI. So, Matt, as we kind of peel back the layers here, obviously, you know, the Westinghouse, Cameco, and you look at like the Brookfields of the world, these are companies that automatically people are going to jump to because they're literally named in the development for these particular loans. but there are also going to be other people involved, a lot of companies that are going to actually own these facilities

Starting point is 00:12:22 or some of the people that are going to be helping. So as we drill down into the sector, who's going to actually benefit here? Well, I own Brookfield in my portfolio, so you're saying that I'm in a pretty good position here. But beyond that, there are a lot of companies that could be kind of more adjacent beneficiaries of this. The question is, we don't know yet. We don't know who's going to get the contracts for these nuclear reactors.

Starting point is 00:12:44 But Constellation Energy is really kind of a frontrunner, ticker symbol CEG. They are already the largest nuclear operator in the U.S. And they have long-term energy supply deals with companies like Walmart, you know, really kind of providing, already committing to providing the power for the AI build-out. They're a top candidate to get one of the new reactors. GE, Vernova could be a big beneficiary. They provide, you know, turbines and other equipment that are used in nuclear plants. uh companies focused on power infrastructure because it's not just building the plant it's

Starting point is 00:13:15 getting the power to its end user uh quanta services ticker symbols pwr uh that does grid and transmission work for example so a lot of these kind of behind the scenes plays could be big beneficiaries i want to push back just a little bit like you're saying on these on these beneficiaries though because wait you know there's the tech i would call this the ten thousand dollar question is, does any of this actually move the needle for like those companies, for Constellation and GE Vernova? You know, Constellation already has a massive generation capacity fleet. We've mentioned that before. GE Vernova, you know, they can't seem to keep up with gas turbine demand for AI data centers. They're projected to be already out until 2031. Who knows when they'll be able

Starting point is 00:13:55 to actually make one for a nuclear facility. So is a few reactors really going to like be part of the thesis for these companies? I mean, it seems like the nuclear energy industry needs these companies more than these companies need nuclear energy. Yeah, well, I mean, I would argue that the low cost of capital could be a needle mover for some of these companies because it really reduces borrowing costs. It could be a major margin improvement, even if it's kind of an incremental change. But I would really kind of say that the picks and shovels plays, like that Quanta services that I mentioned, like companies that participate in other forms of the build out, like even like concrete companies that specialize in power plants, the picks and

Starting point is 00:14:37 shovels companies are the ones that are really likely to see a needle moving effect here. It's just a question of who, because as you mentioned, there were very few companies actually named, you know, Westinghouse, very, very few companies actually named in the, you know, the announcement. Yeah, I mean, it'll be interesting to see. They are creating some special purpose vehicles to build out these five major projects. And so it really does depend on, I could see there being some smaller players that get part of these jobs that for them, it actually is quite a significant needle moving event. But as you point out, some of these energy companies are quite large, and so maybe a single nuclear reactor, though that is significant as far as the national security aspect goes, but from a business point of view, maybe not a huge material driver of results. While we're on the topic of nuclear, we actually got a listener mailbag, and we'll hit that after the break. everyone here's a quick reminder if you want to get a question in we'd love answering them on air

Starting point is 00:15:44 go ahead and send out your questions to podcasts at fool.com that's podcasts with an s at fool.com three rules as always keep it foolish keep it short enough to read on air and don't ask us for any personalized advice so we don't get in trouble with the sec this is actually an older question But because we were talking about nuclear, I wanted to bring it back up, and I thought it was an appropriate time to answer it. And this is from Adam Ragoor. And I modified the question a little bit, but the question was, thoughts on how young investors, and probably focused on the young part, should capitalize on the energy boom.

Starting point is 00:16:17 And there was a little bit of a bonus here, because we were talking about nuclear, and he asked specifically about a couple of the small modular reactor companies that are out there. One of them's Oklo, ticker O-K-L-O, and New Scale Power, ticker S-M-R. Yeah. So, I mean, it's a great question because according, you know, this is according to Goldman Sachs. So data center power demand is going to grow 160% by 2030. And, you know, data centers need virtually 100% uptime. You can't like have that go down. Claude went down for about 30 minutes the other day and you would have thought the internet ended. You know, through 2030, it's estimated that $1.3 trillion of this capex we're hearing from the hyperscalers is just going to be spent on power

Starting point is 00:16:59 generation and related infrastructure. So although I am a believer in small nuclear reactors as a long-term solution, you're not going to find the companies like Oklo that are essentially pre-revenue nuclear startups in my portfolio. Although to be fair, that might be different if I was in my twenties, not in my mid forties. But even when you're focusing on established profitable businesses, there are some really good options. I mentioned Constellation Energy earlier in the show for real nuclear exposure now. Solar is going to be more of a near-term solution, in my opinion. And First Solar, ticker symbol FSLR, they're a fast-growing domestic company, so they don't have tariff concerns that a lot of other solar operators do. And they're in

Starting point is 00:17:38 an excellent financial position right now. But solar doesn't work 24-7, so a battery storage plate could also be worth a look. NextEra Energy, I've mentioned, it's a nice combination of a boring utility with the largest renewable power developer in the United States. And they have a big backlog of specifically energy storage products, ticker symbols NEE on that one. But I would end by saying power producing is only one side of it. There's also a massive opportunity in making things more efficient than they are right now. Like I mentioned IBM earlier, the chips that use 70% less power. At a time when data center projects are being constantly delayed by power constraints, products that make them work on less energy are extremely valuable. And

Starting point is 00:18:23 I really see that as one of the big investment opportunities here as well, not just IBM, but any companies that are really working on the efficiency side of things. Yeah. I don't want to talk about companies in particular to answer Adam's question, but I want to kind of lean on my experience of getting started a little wet behind the ears. I really dove into the energy industry in particular when I got started, and I learned a lot of lessons the hard way. And one of the hard lessons I learned here is there's aren't many incentives to be innovative in the energy industry. And even though there is like this natural tendency as a young investor to gravitate towards like new and novel technologies, because it's, you know,

Starting point is 00:19:02 going to be the future. Just for example, like utilities, both regulated and unregulated, you know, they care almost exclusively about power being cheap and reliable. They're not really in the risk-taking business. There's little incentive, if any at all, to experiment on new tech and why it's so hard for these new techs to break through in the industry. It becomes like a chicken and egg situation where it's like, nobody wants to try it. And if nobody tries it, you can't bring the costs down. And it just kind of spirals into who's going to blink and actually do that. Now, maybe, and this is me squinting really hard to find a thesis, there's a little bit more interest in some of these novel ideas, like you mentioned, Oklo and new scale power,

Starting point is 00:19:45 because demand is rising so fast and we're trying to patch together some new concepts. And maybe that makes it worth it. But interest in novel tech doesn't necessarily translate into commercial success either. So as somebody who has been burned many, many times trying to go after the next big thing in energy, really take a big, tall drink of cold water before you make any big bets in the energy industry. On those lines, Tyler, if you're a new investor listening to this podcast, I would encourage you to figure one thing out really quickly. Learn the difference between investing in the future and speculating on it, because that's a huge difference. We do want to be forward-looking in our investment theses, but there is a point where we cross over

Starting point is 00:20:29 to... We're just speculating on a very unlikely scenario playing out in the future and being a big winner if that happens, rather than actually investing in what's happening right now and where it's going. Anecdotally, I believe in hydrogen fuel cells. I do like that concept. And a friend came to me several years ago wanting to invest in Nikola. And that's what Nikola was really pushing forward these hydrogen fuel cells. And I encourage this friend of mine, be careful with this stock because yeah, while there's some cool ideas here, it's not really a business. They're not really making anything yet. And it turns out that that company went bankrupt before they reached production. I think that in the nuclear industry right now, we're seeing some

Starting point is 00:21:17 companies come to the market that I think will eventually go to zero. I don't know which ones, but I think there are some that will. Basically, you have people who are really good marketers who are able then to get VC funding and public funding to assemble a team to build a business, but they don't really have a business yet. So there's not really much to invest in there. There is something to speculate on, but it's not really investing in the future per se. So I would encourage young investors, newer investors to be careful with that. If you really like nuclear, I mean, there are some really solid plays like Vistra Energy has nuclear business, ticker symbol VST, but that company isn't going away. Huge, huge installed base in

Starting point is 00:21:59 Texas, California. So, I mean, that's a real business that you can invest in. John, did this friend of yours happen to have a name, Ron Rast or something like that? You know, this is a safe place. You can actually admit if you were the one who did it. No, no, no, no, no. It wasn't me. Okay. that is all the time we have for today Adam I hope that answers your question Matt, John thanks for sharing your thoughts

Starting point is 00:22:22 I'll hit disclosure and we will get out of here as always people in the program may have interest in the stocks we talk about and The Motley Fool may have formal recommendations for or against so 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

Starting point is 00:22:38 are sponsored content and provided for informational purposes only. To see our full advertising disclosure please check out our show notes Thanks for our producer, Bart Shannon, and the rest of the Motley Fool team. John, Matt, and myself, thanks for listening, and we'll chat again soon.

Motley Fool Hidden Gems Investing - Nuclear Energy Gets a Big Government Boost (Again)

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