Exciting (But Crowded) Opportunities

0:04Tyler Crowe:Is it just us or is it getting a little crowded in here? This is Motley Fool Money.

0:20Tyler Crowe:Welcome to Motley Fool Money with the Hidden Gems team. I'm Tyler Crowe and today I'm joined by longtime Fool contributors, Matt Frankel and Lou Whiteman. Earnings are still trickling in at a much slower pace where, you know, they're still on their way, but not a whole lot going on this week in that regard. And much of the headlines out there today are about the conflict in the Middle East. But the Monday crew touched on that on yesterday's show. So we're going to do a little bit of a theme today that we're calling, hey, this space got pretty crowded awfully fast. And the theme is basically industries that used to be devoid of competition that are now all of a sudden a hotbed of startups and IPOs and investing opportunities that clearly a lot of investors are interested in today.

1:05Tyler Crowe:Now, this isn't a new phenomenon. We often go through periods where a new technology captures the hearts and minds of the market and we see a rush of new companies into that space. One that comes to mind for me as an investor and somebody who's been writing about the markets for a while was there was this period in the early 2010s where we thought natural gas was going to displace diesel engines in semi trucks and trailers for transportation of goods because diesel was so expensive. Natural gas was so cheap because of the shale revolution. And, you know, that just kind of sputtered out over time.

1:36Tyler Crowe:Guys, are there any other phenomenon like that that come to mind for you guys?

1:40Lou Whiteman:3D printing just a couple of years ago, maybe quantum computing now. The Bitcoin miners, yeah, that's a weird one. But yeah, lots of times this happens.

1:49Matt Frankel:I'm going to go in a little bit of a different direction. I'll say ETFs. There are more ETFs now than there are individual stocks in the market, especially when it comes to these leveraged ETFs, these single-stock ETFs that you can get two times exposure to them. That's really blown up. How do you choose ETFs at this point? There's a lot to unpack there.

2:10Tyler Crowe:Yeah, it's much like more mutual funds in the 1990s than there were individual stocks as well. One place in particular, and this is kind of where the concept of this idea came, was one industry in particular is space or investing in space. It's a place where we've seen things get crowded kind of fast. If we wind the clock back like 10 years ago, there were basically two companies doing rocket launches. There was United Launch Alliance, which is a joint venture between Boeing and Lockheed Martin. and in europe there was arian space which is part of like airbus and safron and a bunch of other european companies and then there was this plucky startup it was called spacex and they were looking to break into the industry by like drastically reducing the cost of putting stuff into space and 10 years into the future now we're seeing a new space race but instead of the us versus the ussr it's companies buying to build cheap rockets put a bunch of satellites into low earth orbit and space stations potentially to replace the international space station.

3:10Tyler Crowe:And just this week, and this is part of the reason we're talking about it, there was a private company called Sierra Space, and it just did a funding round that would value it at$8 billion, which is on par with a lot of the publicly traded company valuations we're seeing today. So guys, as space becomes a more crowded industry with lots of players, how are you viewing the opportunities? Are there particular parts of the space business that look more attractive than others? Or is this really like a company-by-company basis where you really have to turn over stones?

3:38Matt Frankel:Well, yes, it is a company-by-company basis. There's a lot of potential here. Depending on the source that you're looking at, the space economy worldwide is set to roughly triple to about$2 trillion in size by 2035. There are a lot of different types of companies that will stand to benefit. For me, I'm looking at companies like Defense Stocks and other stocks that are going to benefit with the space revolution without completely focusing on it. Moog is one company in particular that comes to mind. Ticker symbol is MOG.A. It's a leader in precision motion systems that have a lot of potential applications.

4:13Matt Frankel:But it also produces the flight controls for some of the most widely used aircrafts for both military and commercial use. Companies like that are going to be fine regardless of whether or not they actually benefit from the space race, but have a lot of opportunities for space applications as well.

4:32Lou Whiteman:Yes. There's definitely a huge opportunity, but the capacity being thrown at it is wow, right, Tyler, to your point. What that tells me, there are going to be winners and losers. Not everyone is going to win here. Generally speaking, I think there's room for more lift specialists, even though we have seen so many companies that just want to light rockets. The logjam is the pads, the actual locations to launch from. If what Matt's talking about, if this trillion-dollar economy is going to emerge. We've got to get a lot of things into space. We need more launch sites. We need more rockets. Even though we've seen a ton of startups here, demand will grow.

5:13Lou Whiteman:We do need that capacity that they're bringing online. On the other hand, though, there are some areas where I do think that there are too many players for the market. Two of the most popular ones scare me, communications and imaging. In communications, We have legacy players like SES. We have a lot of newcomers, Starlink, Amazon Leo, a whole range of others doing other things. There's also the national security stuff there, too. But there's a lot of money, a lot of satellites chasing what is still a pretty limited opportunity. I don't think all of those are going to make it. In imaging, there are some pretty good established companies that can do high-resolution imaging.

5:53Lou Whiteman:There is a need for the product. but I don't think that product needs to be refreshed as often as their business models would like them to. I don't think the recurring revenue is going to be what they hope. The economics of the business, I think they're going to be a little challenged. There's a need there. There's definitely one company doing this, but is there enough volume demand for high-resolution images? I don't know if there's enough to sustain all these companies.

6:21Tyler Crowe:It's interesting. I think there's going to be a lot of parts of the supply chain or part of the value chain of space that's going to have very different economics than what we're seeing today. And then obviously, space investing is going to attract a particular type of investor, perhaps the more cavalier, maybe a little more risk on, you know, somebody that's not afraid of backing a company where the track record and profitability isn't quite there yet. So for both of you, absent profits, what are some of the things that you're looking for in the spaces you find most interesting that are going to be signs of success for companies in this industry?

6:57Lou Whiteman:Yeah, so it's literally rocket science, right? So, I mean, it's hard. And so many of these, especially because of the SPAC boom, these companies came public very early. And a lot of them, I've described them as science projects funded by equity investors. I think you have to take a good look at two things here. A, will the science project work? Because that is a huge if for some of these. There's some really creative, amazing things that are being attempted. There is the question of, we are using equity money to fund this R &D to find out if this works. That's where people get excited when it works.

7:31Lou Whiteman:Too often, the mistakes that are made is in that second question, which is, can you turn this into a viable, sustainable business? There are a lot of things that we can prove in the lab or prove that will work. But to turn that into a business that has a big enough audience that you can build a revenue base to support your research in the long term, that's really, really hard to do. A lot of these total addressable markets look better in the PowerPoint than they do in the real world. So, that's the filter I'm trying to use. Really think through, even if this works out as planned, what is the actual market here?

8:09Lou Whiteman:Who's going to spend money on this? And is it sustainable long-term?

8:13Matt Frankel:Yeah, I don't have too much to add to what Lou just said. I look for companies with a lot of financial flexibility. That's one thing. Some space startups have a lot more than others, especially those that don't have profits. You want several years of runway. Some unique advantages in their product ramp and relationships with all the contracts and government deals that they're getting with predictable revenue streams and things like that. That'll lead to growth. That's what I'm looking for.

8:41Tyler Crowe:With this idea of crowded spaces, this is going to be the ending question for both of our segments today. On a scale of 1 to 10, where 1 means there is room for a lot more winners in this space, and 10 means we're going to see massive consolidation before anyone even makes any money here. How crowded is the space industry today?

9:03Lou Whiteman:So overall, it's probably higher than this, but I'm going to go with a 5 simply because if you really look at it, there are some areas that are desperate for investment. There are some areas where there's just too crowded. All in, I do think there's consolidation, but I do think there's plenty of wiggle room. I went right down the middle of five.

9:21Matt Frankel:Yeah, I said eight. I think there are a lot of space startups that are not going to make money. That's why I'd advise a little bit more caution when it comes to how crowded this is and to be very selective before investing in space companies.

9:34Tyler Crowe:After the break, we're going to go from outer space to breaking down at the smallest level with uranium atoms.

9:40Lou Whiteman:In a world full of noise, long-term thinking stands out. On the Capital Ideas podcast, Capital Group leaders explore the decisions that matter most in investing, leadership, and life. It's a rare look inside a firm that's been helping people pursue their financial goals for more than 90 years. Listen to the Capital Ideas podcast from Capital Group, published by Capital Client Group, Inc.

10:01Tyler Crowe:So of all of the industries that are getting more crowded this day. This is the one that confounds me more than others. It's nuclear power. The Fukushima Daiichi disaster in 2011 looked like it was going to be the breaking point for nuclear power. New construction of plants was already low. And then we saw rapid shutdowns in Japan. And there was accelerated retirements across Europe and the US to a lesser degree. And again, we hit the fast forward button to the past 12 months. And I can't ever remember fielding so many questions or opinions on uranium miners and companies looking to bring about a nuclear renaissance with novel technologies like small nuclear reactors.

10:43Tyler Crowe:Companies like New Scale Power and Ocklo are getting loads of attention these days. But there are lots of other private companies and smaller entities in larger corporations that are looking to get a slice of this nuclear pie as well. And one of the other stories that was a flashpoint for this today was there was a French company that was a small modular reactor, and they're getting a fresh round of funding that values them at a quarter billion dollars for what is essentially, as Lou put in a previous segment, a science project. I'm a little puzzled by all the interests in nuclear power companies these days, but I want to get each of your takes.

11:20Tyler Crowe:Is all this bluster and just kind of hype for growth of power in general? Are we going to really see this talk and this nuclear renaissance that's been kind of chattered about for a while actual turn into facilities, construction, like a real tangible push towards nuclear power? Yeah.

11:41Matt Frankel:I mean, I'm not really puzzled by it. There's a big need for power right now, and it's only going to grow, and it has to come from somewhere. I know you said that solar and wind, and we've had this discussion several times, are likely to be more of the near-term solution. I agree, it's easier to ramp up and things like that. But it's not going to be the only solution, especially if AI infrastructure demand keeps growing, as we keep seeing in all the headlines. To be clear, I'm not going to go run out and invest in a bunch of nuclear startups. It's not my wheelhouse. But it's a big opportunity for sure.

12:13Matt Frankel:About 5 % of U.S. power generation currently is consumed by data centers. Most experts expect that to more than double to about 12 % by 2028, so pretty soon, and to continue to grow from there. There's really a need for sustainable round-the-clock power for data centers. While wind and solar, they have a lot of potential, and there are things like battery storage systems to store the energy that they generate. There's a lot to like about nuclear. In practice, utility-scale solar only runs for about six hours per day on average. Nuclear powerhead's reliable, it's energy-dense. Not only that, there's a lot of bipartisan support to develop these technologies, like you mentioned.

12:53Matt Frankel:There's also a lot of big commitments from the big tech companies who are going to need this power. Like I said, I'm not really surprised by the hype that we're seeing.

13:01Lou Whiteman:Yeah, I think the attention makes sense. The need is real. I do think that if they can get nuclear right, it will stomp all over some of these renewables. I do think the opportunity is there. The hard thing here, though, is the payback for investors. Nuclear is hard. Nuclear is expensive. I think I'm a little hyperbole here, Tyler, but every project in history, it seems, has taken longer and cost more than expected. I am skeptical about SMRs and all of this until they actually get there. And you see what it costs and what it looks like. If anything, scale used to be your friend at nuclear to bring the cost down.

13:39Lou Whiteman:I don't know if these problems will ever get solved. And I look, if anyone gets it right, there's a ton of money to be made. But I am skeptical enough about just how hard of a problem this is to solve that I am very content as an investor to sit this out until even like the fifth, sixth inning. I'll get on it eventually if it actually works. But I think there is a lot to prove here before it's really investable for me.

14:04Tyler Crowe:One of the things that isn't quite discussed as much is, you know, we mentioned New Scale and Oclo, and there's a couple other publicly traded ones. But in addition, there is, as far as I know, there's at least seven to eight more private companies or companies like GE with their, I think it's actually now GE Vernova. You have Rolls Royce, companies that are massive conglomerates that are also kind of have SMRs down like in the lab. They're working on them as well. And this is where I struggle a little bit with this whole thing is what's the upside? and a little bit to lose point here, generating power isn't necessarily a high return endeavor.

14:42Tyler Crowe:Most of the industry, at least in the United States, is regulated where there are fixed rates of return if you're working with state regulated utilities. And we've all seen the forecast for AI power demand as you alluded to, Matt, and there's going to have to be power generated assets to put electrons in the system. But is lots of growth at relatively low margins, relatively low rates of return, maybe 10, maybe 15 years from now, really an appealing proposition, or am I underselling the opportunity here?

15:13Lou Whiteman:I think, especially for the small modulars, the SMRs to work, I think that the game plan is to bypass the grid and bypass the regulated utility side. Offer this on a case-by-case basis to data centers, big users, and get by. Look, again, if they work, I think there will be demand, and I think there will be some pricing power if you can deliver it. I know there's a lot of competition here. I have a hard time imagining anybody figuring it out. I am not ready to say that just across the board, there will be a dozen different competitors here. It's just a really hard problem. Look, a lot has to go right in that scenario.

15:53Lou Whiteman:I think your point is well-made, but I think there's at least a story for investors to tell themselves of how this works out as a really profitable enterprise.

16:03Matt Frankel:There are a few different categories here. As Lou mentioned, bypassing the grid is one opportunity that could potentially lead to higher margins. There are some of these nuclear startups that are going to build plants and then sell them to third parties. That's like investing in an infrastructure investment like Brookfield or Brookfield Infrastructure, things like that. There's a lot of different ways you can go. And that's a really broad question. I don't think you're underselling the opportunity, but it's really worth kind of paying attention to how each of these are planning on making money in two, three, five, 10 years once they really ramp up their scale.

16:37Tyler Crowe:Same question as we had for space. On a scale of one to 10, how crowded is the nuclear industry today?

16:44Lou Whiteman:So this one, I'll go all the way to an eight because I just, again, I have a hard time believing that anyone really figures this out. For a bunch of them to figure it out, wow, if it happens. But I'll believe it when I see it.

16:57Matt Frankel:Yeah, we're on the same page. I gave it an 8. Even more so than space, there's a lot more pre-revenue nuclear startups that are dominating the headlines. They're not all going to make money. Those that do, they could run out of money before they start making money. There's a lot that we're going to see about that. I'd say about Nate.

17:16Tyler Crowe:After the break, we're going to do, instead of stocks on our radar, we're going to do stories on our radar.