After surging 500% in two years, the Rolls-Royce (LSE: RR) share price is near an all-time high.
There are a host of reasons why the FTSE 100 engine maker has outperformed. These range from rebounding global travel and strong defence demand to lower debt and expanding profit margins.
However, there’s now growing interest in the company’s emerging small modular reactor (SMR) business. This comes after the Czech Republic’s state utility ČEZ Group chose it as the preferred supplier for its mini-nuclear reactor programme.
Should you invest £1,000 in J D Wetherspoon Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if J D Wetherspoon Plc made the list?
Indeed, ČEZ is set to acquire a 20% stake in Rolls-Royce SMR, pending regulatory approval, with plans to install up to 3GW of capacity using the company’s technology.
Unlike conventional nuclear reactors, SMRs are factory-built, cost-effective, and can potentially be manufactured at scale before being assembled on-site. They offer consistent, low-carbon power generation.
Rolls-Royce is at the forefront of this emerging industry, with ambitious plans to bring SMRs to the global energy market.
Could this send the Rolls-Royce share price higher? Here’s my take as a shareholder.
Going nuclear
As I see it, there are three powerful forces pushing the world towards SMRs.
First, countries in Europe and elsewhere are striving to meet net-zero carbon emissions targets, meaning the demand for reliable and clean energy sources is escalating.
Second, nations are keen to reduce reliance on volatile global energy supplies. SMRs offer nations a pathway to energy independence by reducing reliance on imported fossil fuels.
Lastly, there’s artificial intelligence (AI), specifically data centres where the AI revolution is taking place.
Apparently ChatGPT uses almost 10 times as much electricity to process a query as an old-fashioned Google search. According to Goldman Sachs, electricity demand driven by AI will grow 160% by 2030!
Consequently, this is threatening the green targets of tech giants. For example, Google’s emissions have risen by nearly 50% since 2019 due to AI.
The solution these firms have settled upon is nuclear. In September, Microsoft announced it would take energy from Three Mile Island, activating the nuclear plant for the first time in years.
Meanwhile, Google and Amazon have signed deals to buy energy from a future fleet of SMRs.
Reality check
Now, it should be remembered that this technology isn’t expected to be widely deployed till the mid-2030s. A lot could happen between now and then.
In the meantime, Rolls-Royce SMR is losing money. In H1, it reported an increased operating loss of £91m versus £78m in the prior period. It’ll clearly need regular injections of cash to fulfill its ambitions.
Plus, there’s a risk that Rolls doesn’t emerge as one of the two winners in the ongoing bidding process to deploy SMRs across the UK. That’d be an embarrassing setback. We’re due to find out in the next few weeks.
My Foolish takeaway
According to IDTechEx, the global SMR market will reach $72.4bn by 2033 and $295bn by 2043. This highlights both the massive opportunity and how long away it is.
Still, SMR stock Nuscale Power has rocketed 277% in three months, driven higher by excitement about AI data centres. If Rolls gets the nod from UK regulators, the stock could likewise fly higher.
I won’t be buying more shares for the SMR potential alone, but it’s an exciting part of the business.
