Investing in energy has been a hot theme this year amid the incredible growth opportunities related to artificial intelligence (AI). As new cutting-edge technologies require more energy, investors have been looking to opportunities outside of tech. And one of those has been nuclear energy.
Many investors see nuclear energy as a cleaner alternative to oil and gas and a possible long-term solution for AI's growing power needs. That has led to a surge in the value of many stocks in this space, including Oklo (OKLO +0.22%), which has surged nearly 400% since January. But with such a tremendous rally in the books already, has the stock gotten too hot, too fast, or can there still be room for it to rise even higher?
Image source: Getty Images.
Oklo is a rarity in the stock market
At a market cap of more than $16 billion, Oklo has risen to an incredibly high valuation on simply hype and expectations alone. There aren't any fundamental reasons to justify its current price tag. The company doesn't generate any revenue, and it's simply piling up expenses and burning through cash.
Valuations for companies at such early stages in their growth are typically much more modest, and at the time of this writing, there are only two others that have market caps of more than $10 billion: Summit Therapeutics and Revolution Medicines. While Oklo is the most valuable of these three companies, none of them are currently generating any revenue.
That's not a good thing. It sets sky-high expectations for the business and makes it more probable that it will fall short of them.
While any positive news related to nuclear energy could give Oklo's valuation a boost, anything to the contrary could have the opposite effect. In the meantime, the company is burning through cash, and the risk of future dilution is high, especially as it hopes to scale up its business.
Investors should brace for significant share offerings
When a company isn't generating money, as is the case with Oklo, it needs to raise cash somehow in order to grow its operations. Creating its nuclear powerhouses isn't going to come cheap, and that means frequent stock offerings may be the solution to its cash flow needs. In the process, however, that can drive down the stock price as more shares flood the open market.
NYSE: OKLO
Key Data Points
Earlier this month, the company announced it plans to sell up to $1.5 billion in shares through an at-the-market equity offering. Oklo's share count has been rising this year, and investors should expect this trend to continue.
OKLO Shares Outstanding data by YCharts.
Oklo is a highly risky stock
Although the stock has been on a tear this year, there's no denying Oklo's valuation has reached absurd levels. And cracks have been showing, as the stock entered this week trading at less than $105 -- down 46% from its 52-week high of $193.84.
Despite the decline, however, its market cap remains astronomical given its financial performance (its net losses total $77 million over the past four quarters) and the high risk that comes with the stock.
Oklo is a promising company -- particularly if it can convert nuclear fuel into clean energy, as it claims -- but it still has to prove that it can do this at scale. There is plenty of hope around the business, but there are many question marks surrounding it, too, including whether it can turn a profit and how long that may take.
Retail investors are currently buying it based on a great story rather than fundamentals, and that leaves virtually no margin of safety in case the business falls short of expectations. At the very least, even if hype around AI or nuclear energy dies down, the stock could be due for an even greater decline than it has been on of late.
Given the uncertainty and high valuation, Oklo is a stock I would stay far away from, since there's still plenty of room for it to fall even lower.
