SMR: Landmark US Nuclear Agreement Will Shape Commercialization Path Forward

Key Takeaways

• NuScale's advanced SMR commercialization and partnerships position it well for accelerated revenue growth and immediate deployment in competitive energy markets.
  
• Efficiency improvements and strategic focus on reducing expenses are expected to enhance profitability and support margin expansion.
  
• Challenges in securing agreements, funding uncertainties, and potential supply chain issues threaten cash flow, earnings, and profitability, despite project advancements.

Catalysts

Provides small modular reactor technology solutions.

• NuScale's involvement in the RoPower 6-module small modular reactor (SMR) power plant in Romania indicates future meaningful revenue and cash flow through its partnership in the Fluor-led Front-End Engineering and Design (FEED) Phase 2. This project enhances NuScale's revenue prospects.
  
• With an NRC-approved SMR technology and the commitment of over $2 billion towards its development and licensing, NuScale is uniquely positioned for immediate commercial deployment compared to competitors focused solely on demonstration plans. This potentially accelerates revenue growth once commercial operations commence.
  
• NuScale is advancing the manufacturing of long-lead materials for 12 modules, anticipating customer demand, which supports a smooth production ramp-up, reducing delivery times significantly, and potentially boosting future revenue and earnings.
  
• Significant demand for nuclear energy, especially from AI-driven data centers like Microsoft and Meta, could lead to increased interest and order placements for NuScale’s SMR technology. This could materially increase future revenues as data centers triple their energy use by 2028.
  
• NuScale's focus on reducing operating expenses, as noted by the substantial year-over-year decrease, could lead to improved net margins. Efficiency improvements transitioning from R&D to commercialization are likely to enhance profitability and support margin expansion.

NuScale Power Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming NuScale Power's revenue will grow by 245.8% annually over the next 3 years.
• Analysts are not forecasting that NuScale Power will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate NuScale Power's profit margin will increase from -3888.7% to the average US Electrical industry of 11.2% in 3 years.
• If NuScale Power's profit margin were to converge on the industry average, you could expect earnings to reach $49.7 million (and earnings per share of $0.1) by about August 2029, up from -$415.7 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 167.1x on those 2029 earnings, up from -9.1x today. This future PE is greater than the current PE for the US Electrical industry at 37.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.34%, as per the Simply Wall St company report.

Risks

• The complexity and negotiation challenges of securing long-term power purchase agreements with prospective customers could delay revenue generation and impact cash flow projections.
  
• The U.S. government grant-related uncertainties and the administrative process of securing additional funding highlight a possible risk to future liquidity and investment inflow, potentially affecting financial stability and development timelines.
  
• Potential bottlenecks in the supply chain or manufacturing process for the small modular reactors, despite current advancements, could lead to increased operational costs and affect net margins.
  
• The dependence on the successful commercialization of ENTRA1 Energy projects and the potential delays in customer acquisition for NuScale's long-lead modules pose a risk to revenue forecasts and earnings projections.
  
• The ongoing regulatory approval process with the NRC for the power upgrade and overall project complexity may result in unanticipated expenses or timeline shifts, impacting future earnings and profitability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $12.63 for NuScale Power based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $442.0 million, earnings will come to $49.7 million, and it would be trading on a PE ratio of 167.1x, assuming you use a discount rate of 9.3%.
• Given the current share price of $9.19, the analyst price target of $12.63 is 27.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.