The next AI trend? Amazon, Alphabet, are all investing in it

Since the beginning of this year, companies with nuclear reactors have become the biggest beneficiaries of the growing demand for nuclear energy. This includes Constellation Energy (CEG.US) and Vistra Energy (VST.US), whose stocks have more than doubled this year.

Now, a group of companies that design, build, and fuel new types of reactors are gradually emerging. These companies include NuScale Power (SMR.US), Oklo (OKLO.US), BWX Technologies (BWXT.US), and Centrus Energy (LEU.US), and their stocks may just be starting to rise.

According to the Securities Times, on Wednesday, Amazon (AMZN.US) announced that it will fund the construction of several small nuclear reactors in Washington state and invest in the nuclear energy startup X-energy. Previously, Google's parent company Alphabet (GOOG.US, GOOGL.US) also announced on Monday that it had reached an agreement with the privately held nuclear reactor developer Kairos Power to support the development and construction of multiple reactors. Although specific financial terms were not disclosed, Kairos plans to commission its first reactor by 2030 and is expected to build more by 2035.

Google and Amazon's moves are part of a trend where tech companies are gradually buying electricity from nuclear power plants to meet the needs of their data centers, which power artificial intelligence applications. Microsoft (MSFT.US) has signed a contract with Constellation Energy to purchase electricity from a reactor at Three Mile Island, while Amazon also purchased a data center in Pennsylvania connected to a Talen Energy nuclear plant.

Although these reactor technologies are not new, for example, the Three Mile Island plant closed in 2019 due to economic reasons, Google's deal involves building brand new reactors. Oracle Chairman Ellison also stated that the company plans to use multiple small reactors to power its data centers.

Michael Underhill, Chief Investment Officer of Capital Innovations, said that Google's announcement is a strong signal. He believes, "This is the next industrial revolution, without nuclear energy, artificial intelligence cannot be achieved." Underhill believes that this trend is just beginning.

Kairos is one of the companies developing new small modular nuclear reactors (SMRs). These reactors are smaller in size, faster to build, and more efficient. Existing 94 nuclear reactors typically each generate about 1000 megawatts (1 gigawatt) of electricity, enough to power over 500,000 households. In contrast, the power of small modular reactors is less than 300 megawatts, with Kairos designing reactors with a power of 75 megawatts. Google plans to purchase up to 500 megawatts of electricity.

These reactors are called "modular" because their components are prefabricated in factories and then assembled at the construction site. They also operate differently, with some reactors using processed uranium rather than the uranium used in the dominant light-water reactors on the market. Kairos uses ceramic "pebble-bed" fuel and a molten salt cooling system, which can operate at lower pressures and is considered safer and more cost-effective than traditional reactors Kairos has obtained a license to build a test reactor in Tennessee, but more licenses are needed to build a commercial reactor for Google. Terrapower, a small modular reactor company founded by Bill Gates, also uses molten salt as the energy storage system in its reactor design and is currently working on reactor-related construction in Wyoming.

Kairos CEO Mike Laufer stated that Kairos' reactor operates at higher temperatures and lower pressures, making it safer and more cost-effective than existing technologies. "We don't need the large heavy components required by other nuclear technologies."

Currently, there are only three small modular reactors globally, none of which are in the United States. However, by the 2030s, there could be dozens in operation. The U.S. Congress passed a law this year aimed at expediting the approval of new small modular reactors and reducing approval costs.

While direct investment in this trend is not easy as companies like Kairos and Terrapower are still privately held, X-energy is no exception. However, some other small modular reactor developers have gone public. For example, Oklo, chaired by OpenAI CEO Sam Altman, went public earlier this year through a SPAC merger. Despite significant stock volatility, driven by optimism in the nuclear energy market, Oklo's stock has risen 70% in the past week. The company is still seeking approval for its reactor design.

NuScale, another company based in Oregon, is the only small modular reactor developer to have received design approval from the Nuclear Regulatory Commission. However, the company also faces challenges as its plans to build a reactor in Idaho were terminated due to the inability to sign sufficient power purchase agreements, leading to a sharp drop in stock prices. But with recent announcements in small modular reactor development, NuScale's stock has quadrupled this year, returning to levels before the termination of the Idaho project.

Another way to participate in this trend is through uranium investments. Key uranium miners include North American market leader Cameco (CCJ.US), as well as smaller companies NexGen Energy (NXE.US) and Uranium Energy (UEC.US). Investors can also purchase stocks of uranium enrichment company Centrus Energy (LEU.US). Uranium must be enriched to be used in reactors, and having domestic uranium enrichment capabilities is particularly important as Russia currently dominates the market, and the U.S. Congress passed a law this year prohibiting further purchases of Russian uranium. Centrus has been selling a special type of uranium called High-Assay Low-Enriched Uranium (HALEU), which is used as fuel by many small modular reactor developers.

Small nuclear reactors are becoming a hot new trend in the energy sector. While there is still a long way to go before they can provide power to the grid, once achieved, there may be many winners