Image source: Getty Images
He Rolls-Royce (LSE: RR) share price rose 6.2% in September, taking the year-to-date gain to 73%. And a profit of 645% in two years, who said? FTSE 100 Are stocks sleepy?
Much has been written recently about the company's small modular reactors (SMR). Its goal is to transform nuclear energy from large-scale infrastructure projects into factory-built products.
With businesses and governments increasingly desperate to hit net-zero carbon targets by 2050, SMRs are set to become a huge new growth industry. And Rolls-Royce, which has decades of experience building nuclear reactors for Royal Navy submarines, is positioning itself to be at the center of it all.
First-mover advantage
On September 18, the Czech Republic chose the company as a preferred supplier for these mini reactors. The firm said this “reinforces Rolls-Royce SMR's position as the leader in European SMR technology.”
More good news followed on September 26 when the UK announced that Rolls-Royce SMR would join three other companies in the next stage of its reactor design competition. These are GE Hitachi, Holtec and Westinghouse. NuScale lost.
Chris Cholerton, CEO of Rolls-Royce SMR, commented: “(We are) the UK's only SMR company and is already 18 months ahead of its competitors in the regulatory approval process. Today's news that we will move towards formal negotiation with GBN will help us maintain this important first-mover advantage..”
A winner could be selected before the end of the year. Meanwhile, the company is also among the last two finalists in the selection process in Sweden. Agreements could be concluded with both Sweden and the Netherlands in early 2025.
According to estimates, the global SMR market could reach $295 billion within 20 years. Therefore, this has the potential to boost the company's revenue.
Reality check
Now, as promising as all this sounds, these reactors are not expected to be deployed until the 2030s. Additionally, the funding needed to deploy SMR fleets remains unclear.
In late 2023, US rival NuScale faced a major setback when its contract with a Utah power group was terminated due to delays and cost overruns. The estimated cost of the project skyrocketed from $3 billion in 2015 to over $9 billion in 2023!
A key appeal of SMRs lies in their cost predictability compared to traditional nuclear plants, which have a reputation for going well over budget. So while SMRs have the potential to be a game-changer for the Rolls-Royce share price, there are many uncertainties.
A more immediate concern is the situation in the Middle East. This has already disrupted air travel and could exacerbate supply chain problems, posing additional risks to Rolls-Royce operations.
Long term trends
Of course, increasing geopolitical instability is also likely to drive greater demand for military technologies and advanced naval systems. Rolls Defense revenue rose 8% in the first half.
Meanwhile, with global air travel expected to double over the next 20 years, its key Civil Aerospace division is poised for significant growth.
Finally, its Power Systems business is capitalizing on growing demand for backup power for data centers. According Moody'sGlobal data center capacity is expected to double in the next five years, driven by the energy-intensive demands of artificial intelligence models.
I'm happy to continue holding my Rolls-Royce shares and would consider buying more if the share price takes a hit as we head into winter.
