(POWER PRODUCERS WILL BE ONE OF THE BIG INVESTMENTS OF THE FUTURE)
October 18, 2024
Hello everyone.
The bullish argument for nuclear power generation.
Vistra (VST) $127.27, Constellation Energy (CEG) $271.20, Talen Energy (TLN)$171.68, Cameco Corp. (CCJ)$56.67
There are strong trends in both energy supply and demand that support the fundamentals of existing nuclear power producers.
Beginning with the supply argument, nuclear power plants are a highly valuable and scarce asset.
Nuclear power plants are valuable because nuclear is the only source of carbon-free energy that is reliable enough to be considered "base load energy." Other sources of reliable energy are either dirty (fossil fuels), are not yet reliable (solar, wind), or are not abundant (hydro, geothermal).
The US has agreed to phase out coal and other dirty power sources over time. Coal used to account for one-third of power generation but now accounts for roughly 10%. This supply gap has largely been filled by natural gas and crude oil (see below chart). Nuclear was previously vilified as a dangerous source of electricity; however, politicians on both sides have become much more pro-nuclear in recent years as an increasingly attractive alternative. This has led to several nuclear plant extensions, talks of restarts, and new tax incentives.
Nuclear power is scarce because it is extremely costly and timely to build. Almost all US nuclear reactors were built between 1967 and 1990. Regulatory costs skyrocketed after the Three Mile Island accident in 1979. The Vogtle electric plant in Georgia was the only new nuclear plant added in the last 30 years. Vogtle took 15 years and $30 billion to build. Nuclear power plants just aren't economically viable relative to the cost of building new natural gas plants. However, this makes existing plants, like the one Talen owns, more valuable.
Moving on to the demand argument, electricity demand growth is accelerating as the US adopts electric cars and builds more data centers.
Electricity demand has historically grown in line with population growth; however, recent technology shifts have accelerated the demand on the grid. Artificial intelligence applications are more compute-intensive and, therefore, require more electricity. For example, ChatGPT uses as much as 30x more electricity per query than Google search. Research from the Boston Consulting Group projects data center energy use in the US will 3x from 130 terawatt hours in 2022 to 390 terawatt hours by 2030.
JPMorgan analysts are seeing “structural tailwinds, including manufacturing onshoring, broader electrification trends (transportation, heating, and more), as well as data center development underpinning a paradigm shift in power demand.”
Additionally, analysts see that with half of its gas generation in the Texas ERCOT grid, Vistra can also help fill a potential 40-gigawatt supply gap in the Lone Star State by 20230.
Vistra (VST) is JPMorgan’s top pick, with a price target of $178.
Vistra Energy (VST) Daily Chart
Constellation Energy (CEG) is another favourite of JPMorgan in this sector, and the investment bank believes Constellation’s industry-leading nuclear fleet is well-positioned to continue capturing long-term power contracts with data centre developers at premium prices. Its decision to restart Three Mile Island after signing a power purchase agreement with Microsoft was an industry milestone.
JPMorgan’s price target for Constellation is $342.
Constellation Energy (CEG) Daily chart
Finally, JPMorgan analysts see Talen’s multidecade agreement with Amazon Web Services to power a data centre campus with electricity generated at the Susquehanna nuclear plant in Pennsylvania could help send the stock higher if it delivers the full 960 megawatts of power to AWS.
Over the next 10 years, AWS has contracted to purchase as much as 1 gigawatt of power per year for a price nearly double the rate of the wholesale power price. Amazon is willing to pay a premium to source reliable carbon-free energy for a large data center, and it will also benefit from certain tax credits associated with the project.
Finally, there may be additional opportunities for per-share value growth above and beyond the AWS deal. Talen believes there are additional opportunities to co-locate data centers next to its other power plants. Talen's capital allocation strategy of creatively monetizing existing assets while returning capital to shareholders should continue to work.
It is important to remember that there is a wide moat around the business simply because a new nuclear power plant of Susquehanna's scale cannot be replicated at a cost anywhere near the current enterprise value of Talen.
JPMorgan’s price target for Talen is $268.
Talen Energy (TLN)
Cameco Corp. (CCJ) is a great nuclear power play stock to own for the long term, too. I have been recommending this stock since early 2024.
Cameco Corp. (CCJ) Daily Chart
I would recommend owning at least two of the power produces illustrated here. Scaling in is the strategy you should use.
Earnings Results
Netflix: Earnings yesterday beat on the top and bottom lines. Ad-tier memberships jumped 35% quarter over quarter. Revenue for the full year of 2025 is expected to be between $43 billion and $44 billion. Advertising is expected to become a primary growth driver from 2026 onwards.
I recommended Netflix on January 17, 2024, when it was $480.00. I also recommended you either start scaling into the stock or add weight in Jacquie’s Post on October 10.
Goldman Sachs (GS) and JPMorgan (JPM) also reported great earnings. I also recommended these stocks, or to add weight if you held them, in Jacquie’s Post on October 10.
QI CORNER
SOMETHING TO THINK ABOUT
TRIVIA CORNER
- Which country has the longest coastline?
- Who was the first U.S. billionaire?
- Which first lady was the first to appear on U.S. currency?
Answers in Monday’s Post.
Cheers
Jacquie
