Energy and Nuclear Stocks Recover After DeepSeek Selloff

The U.S. stock markets were routed last Monday after China’s AI lab DeepSeek rattled Silicon Valley after its large language model outperformed American AI leaders, defying American attempts to stop China's high-tech ambitions. According to benchmarks posted on DeepSeek's website, R1 outperformed models from OpenAI, Meta (NASDAQ:META) and Anthropic, who have spent billions of dollars building their models. In a technical report, DeepSeek said its V3 model had a training cost of only $5.6 million–a fraction of the hundreds of millions or even billions of dollars U.S. AI lab charges for its large language models. The fact that the Chinese AI lab was able to accomplish this despite having to navigate U.S. semiconductor restrictions on China--which bans export of powerful AI chips such as Nvidia Corp’s (NASDAQ:NVDA) H100s--makes it all the more impressive.

Among the day’s biggest losers was Nvidia itself, with $589B in market cap wiped off on Monday, marking the biggest one-day loss in U.S. stock history. Broadcom (NASDAQ:AVGO) crashed 19% while mobile chipmaker Qualcomm (NASDAQ:QCOM) fell 16%. In the energy sector, nuclear and electric utility Constellation Energy Corp. (NASDAQ:CEG) tanked 20% with many nuclear stocks declining by double digits. Investors are now questioning the bullish AI-driven electricity demand thesis that Wall Street has been pushing in recent years thanks to DeepSeek matching the performance of power-hungrier AI models. Earlier, Sreedhar Sistu, vice president of artificial intelligence for Schneider Electric (OTCPK:SBGSF), predicted that AI power demand will grow almost five-fold by 2028.

Meanwhile, LandBridge Co. (NYSE:LB) led the selloff, diving 17% after more than tripling since its June IPO. The company owns about 272,000 acres in the Permian Basin, and aims to generate business from land that can support gas-fired power plants in the United States.

Nuclear Stocks Bounce Back

Thankfully, the recent momentum in the nuclear sector has helped many stocks recover after the DeepSeek scare. Last week, President Donald Trump announced a $500 billion joint venture with Oracle Corp. (NYSE:ORCL), OpenAI, and SoftBank (OTCPK:SFTBY) to build AI infrastructure in the U.S. The companies have pledged to commit $100 billion to start, and as much as $500 billion over the next four years toward the initiative, with Trump calling it “largest AI infrastructure project in history.” OpenAI, ChatGPT maker, said it expects the project, called Stargate, to help support American leadership in AI, and that it could create "hundreds of thousands" of jobs in the U.S. Other tech giants including Nvidia Corp, Microsoft (NASDAQ:MSFT)) and Arm Holdings (NASDAQ:ARM) are also expected to be technology partners in the project.

Shares of developer of small, modular nuclear reactors (SMRs) NuScale Power (NYSE:SMR) are up 45.7% in the year-to-date; Oklo Inc. (NYSE:OKLO), which is backed by OpenAI CEO Sam Altman, has surged 105.6%, Vistra Corp. (NYSE:VST) has advanced 26.6% while Centrus Energy (NYSE:LEU) has jumped 28.5% while Constellation Energy is up 34.2% over the timeframe. LandBridge is still up 4.6% YTD.

Meanwhile, shares of Nano Nuclear Energy (NASDAQ:NNE) have returned more than 1,000% since its May 2024 IPO. The shares made further gains after the company was awarded patents related to its designs for a modular transportable nuclear generator. Nano Nuclear is developing ZEUS, a solid core battery reactor, and ODIN, a low-pressure salt coolant reactor.

Long-Term Bullish

Wall Street remains bullish on nuclear energy despite the launch of cheaper and more power efficient DeepSeek AI models. “Demand is definitely going to rise, but by how much, we don’t know,” said Bloomberg Intelligence utilities analyst Nikki Hsu. “Nobody knows exactly what AI demand will be.”

Indeed, DeepSeek’s efficiency could even lead to more widespread use of AI. According to Carlos Torres Diaz, head of power markets research for Rystad Energy, data centers may end up simply processing more data if they become more efficient.

The big nuclear rally kicked off last year after NuScale signed an agreement with Standard Power to supply the data center provider with SMRs. Standard Power--a developer of modular data centers–will use NuScale Power's power solutions at two separate sites, where up to 12 SMRs (at each site) would be used to provide power for new data centers. Suddenly, the market took note of SMRs as a viable solution for data centers struggling to keep up with surging power demands by artificial intelligence (AI) computing.

The long-term outlook for the nuclear sector remains bullish, with nuclear power expected to meet surging AI demand and lower greenhouse gas emissions. The International Energy Agency has projected that global data center electricity consumption will jump from 460 terawatt-hours in 2022 to 1,000 terawatt-hours in 2026. According to Goldman Sachs, escalating electricity needs from running AI data centers will generate downstream investment opportunities that will benefit utilities, renewable energy generation, and industrial sectors. The investment bank has forecast that data center power demand will grow at 15% compound annual growth rate from 2023-2030, with data centers consuming 8% of total U.S. electricity output at the end of the forecast period compared to ~3% currently. Analysts estimate that ~47 GW of additional power generation capacity will be required to meet the growth in U.S. data center power demand by 2030.

Last year, a total of 34 countries, including the U.S., pledged to increasingly deploy nuclear power to reduce reliance on fossil fuels. According to the International Energy Agency's (IEA) report Electricity 2024, nuclear power generation is forecast to reach an all-time high globally in 2025, exceeding the previous record set in 2021 as new reactors begin commercial operations in multiple markets, including China, India, South Korea, and Europe; output from France climbs and several plants in Japan are restarted.

By Alex Kimani for Oilprice.com