It doesn’t take much to realize that uranium producer Cameco (NYSE:CCJ) has a product marketing challenge. That goes for other companies in this space. While nuclear power represents a vital component of the infrastructural equation, few sectors are as catastrophic when circumstances go awry. However, with the enormous energy consumption of artificial intelligence, society must concede something. Logically, nuclear power offers a readymade answer and thus, I am bullish on CCJ stock.
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Understanding Why CCJ Stock Is Poised to Rise
Since the start of the year, CCJ stock has gained slightly over 25%. It’s been on a tear recently, with shares gaining almost 5% last week and about 11% in the past month.
However, in the longer term, CCJ stock has been disappointing. Compared to the highs seen during the 2000s decade, shares haven’t gained that much. So, it’s right to be skeptical about CCJ at this juncture. Still, back then, digital intelligence largely occupied the realm of science fiction.
Fast forward to the present and AI – particularly generative AI chatbots – seems to be everywhere. It’s also impacting various industries. Nowadays, if people have questions, they don’t necessarily need to seek out consultants. They can fire up a free chatbot and ask to their hearts’ content.
With so much demand and long-term potential, it’s no wonder that Bloomberg cited data that suggests generative AI could become a $1.3 trillion market by 2032. If so, that would represent a compound annual growth rate (CAGR) of 42% from 2022 to 2032.
Notably, Grand View Research states that the global generative AI market reached a valuation of $13 billion last year. Further, the sector could directly generate revenue of $109.37 billion by 2030, implying a CAGR of 36.5%. Given that AI touches so many industries, the $1.3 trillion valuation broadcasted by Bloomberg is credible.
Here’s the thing – AI isn’t free.
Yes, running a chatbot is free in many, if not most, cases. Further, an increasing number of enterprises are utilizing their own large language models. However, AI isn’t free in the sense of power consumption.
Digital intelligence is the equivalent of an Italian V10 engine. There’s nothing in the world that sounds like a Maranello-tuned powerplant. Sadly, listening to this sonorous music imposes a hefty petrol bill.
AI Forces a Rethink Regarding Cameco
Given that a surprisingly large number of consumers care about sustainability, it’s safe to say that many would prefer to replace nuclear power with renewable solutions such as solar. However, that’s likely not going to happen because of a principle called energy density.
To use the Wikipedia definition, “energy density is the amount of energy stored in a given system or region of space per unit volume.” According to Drexel University, “solar energy has a density of 1.5 microjoules per cubic meter, over twenty quadrillion times less than oil.”
That’s a problem. Basically, you need a gargantuan amount of space to make solar facilities viable. It’s just a scientific reality.
In sharp contrast, the uranium industry’s mainline strength is the underlying energy density. Per the Nuclear Energy Institute, “One uranium fuel pellet creates as much energy as one ton of coal, 149 gallons of oil or 17,000 cubic feet of natural gas.”
Solar suffers from exponentially worse energy density, while nuclear fuel enjoys exponentially greater density. This is a lifeline for CCJ stock.
As The Washington Post noted earlier this year, data centers consumed more than 4% of the total national electricity output in 2022. That’s not surprising, given the explosive demand for AI and various digital innovations. However, these technologies are putting a massive strain on the power grid.
TipRanks reporter Paul Hoffman made a similar case about AI and the nuclear energy industry. Based on the broader context of increased demand for AI-related infrastructure, “Nuclear power, with its renewed appeal due to low carbon emissions and round-the-clock reliability, appears ideally positioned to meet the skyrocketing power demands driven by AI.”
In other words, CCJ stock may be just getting started.
Valuation Concerns Need to be Brought Under Context
On paper, CCJ stock looks significantly overvalued, which contributes to some of the skepticism. It’s difficult to argue otherwise. Right now, shares trade at a trailing-year earnings multiple of almost 143x. If that wasn’t bad enough, buyers of CCJ must trade at a price of 13x trailing-year sales.
To be fair, it’s difficult to classify CCJ stock because the uranium industry doesn’t have its own subsegment. Still, if we look at the utilities sector, the categories within the ecosystem generally feature an earnings multiple between 19x to about 27x. For revenue, the multiple runs between 1.9x to nearly 3x. Either way, Cameco is well above the norm.
Here’s what you need to concentrate on. AI-related power consumption shows no sign of stopping. More than likely, this consumption will worsen. As stated earlier, the readymade solution is nuclear energy. That’s a huge positive for CCJ stock.
Is Cameco Stock a Buy, According to Analysts?
Turning to Wall Street, CCJ stock has a Moderate Buy consensus rating based on eight Buys, no Holds, and zero Sell ratings. The average CCJ stock price target is $57.04, implying 5.4% upside potential.
The Takeaway
With the generative AI craze showing no signs of slowing and with digital intelligence imposing severe strains on power grids, the nations that have embraced this technology must make a difficult decision. Since no one is going to go backward in terms of technical development, Cameco and the nuclear fuel industry have received a robust relevancy lifeline. It may be a controversial play, given the controversies tied to uranium. Still, there really is no choice.
