Kerrisdale Capital's investing note for the month of November 2024, titled, "Oklo Inc. (OKLO): Fission Impossible".
We are short shares of Oklo Inc. (NYSE:OKLO), a $3bn nuclear energy company that went public via SPAC six months ago – with no regulator-approved design, no revenue for years, and no proven commercial viability for its planned 15-50 MWe microreactors. A story stock which has seen shares rocket 300% amid retail interest for all things nuclear, Oklo faces massive technical and financial challenges in its quest to become the owner-operator of hundreds of nuclear “powerhouses.” In classic SPAC fashion, Oklo has sold the market on inflated unit economics while grossly underestimating the time and capital it will take to commercialize its product. Following a disappointing 3Q business update which saw its stock price collapse 24%, shares have foolishly rebounded on the recent nomination of Chris Wright, an oil services CEO and Oklo board member, for Energy Secretary despite the potential appointment providing little substantive change to Oklo’s fundamental outlook.
Virtually every aspect of Oklo’s investment case warrants skepticism. Oklo does not currently have regulatory approval from the Nuclear Regulatory Commission (NRC) to build its reactor. Oklo is currently working to submit a license application in 2025, with hopes of a first reactor deployment by late 2027. A former NRC Commissioner we spoke with dismissed this saying “Oklo is a company that has a lot of hubris,” the timeline is “beyond optimistic” and “it will probably take at least 4 years to obtain a license.” Oklo brags that it has a “leading market position” despite a former employee telling us that senior management is “a team of very inexperienced people” and the company has fewer than a quarter of the employees enjoyed by competitors who have partnered with Big Tech companies.
Oklo believes its small, liquid sodium-cooled reactors will be cheaper, easier to build, and safer than conventional nuclear plants – the same benefits touted by small, modular reactor (SMR) proponents for decades. We believe investors should be wary of unsubstantiated claims spouted by these “Nuclear Bros.” Recent SMR projects have experienced dramatic cost escalation, Oklo does not have the long-term supply of enriched uranium fuel it needs (and won’t well into the 2030s), and sodium-cooled reactors have well-documented reliability problems.
The lack of commercial fuel supply has not kept Oklo from using outlandish fuel cost assumptions in its unit economics forecasts. Though billed as “for illustrative purposes only,” these unit economics are nevertheless used by Street analysts in their formulation of ~$10 price targets (55% below current). Based on a range of expert interviews (and confirmed by a former Oklo employee), the fuel cost assumption which underpins Oklo projections is lowballed by a factor of 5x. If one assumes more realistic costs, the revised overnight capital costs, levelized cost of energy, and cash returns of Oklo’s powerhouse reveal a reactor which is not commercially viable. As one industry participant explained, “If they put real numbers of today in there, this program would be over.”
Not satisfied with merely selling designs of its reactor, Oklo ambitiously wants to build and operate them as well (despite zero experience doing either). One Street analyst estimates $2.7bn in additional capital over five years would be needed to execute Oklo’s deployment plans. After a parabolic rise in Oklo’s share price, we see the risk of new share issuance as significant. As setbacks to overpromised timelines and costs give way to the all-too-predictable need to raise dilutive capital, the unsustainable energy in Oklo’s stock will fizzle out.
Executive Summary
Regulatory approval and deployment timelines are unrealistic. Oklo currently aims to submit a commercial license application in 2025 and deploy its first reactor by late 2027. According to a former NRC Commissioner we interviewed however, it will take at least 4 years for a commercial license to be granted and Oklo’s expectation of a first reactor by 2027 is “beyond optimistic.” The recent nomination of oil services company CEO and Oklo board member, Chris Wright as the next Energy Secretary does not change this timeframe (nor any of Oklo’s myriad other commercialization challenges). According to Oklo, the nuclear sector already has “overwhelming” bi-partisan government support and the company enjoys a close relationship with the Department of Energy (DOE), an agency which has awarded billions in support of SMRs for decades. Based on numerous conversations with industry experts, regardless of who heads the DOE (a revolving door position few hold over 2-3 years), Oklo suffers from a fundamental lack of design readiness and remains a very tough sell at the NRC.
Oklo’s promoted unit economics are not credible. Based on our research, we believe Oklo’s assumed fuel cost of $7,000 / kg for high-assay low-enriched uranium (HALEU) is lowballed by a factor of 5x – a massive red flag. We believe this was done because if more near-term realistic fuel cost assumptions were used, Oklo’s capital costs would rise far beyond what was promoted in its SPAC presentation and investors would rightfully question the project’s commercial viability. Rather than deliver commercially competitive power, we believe Oklo will endure the fate of other SMR projects and watch costs skyrocket above initial estimates.
“Nuclear bros” management team lacks experience and resources. Oklo’s senior management have largely academic backgrounds and lack proven nuclear industry experience. This has resulted in significant underestimation of what is necessary to bring the company through the regulatory process to full commercialization. A former employee described the company as a “a team of very inexperienced people, who haven’t seen a real product, and don’t understand the real world.” Oklo has a fraction of the team and resources of SMR competitors which have recently won agreements with Big Tech. While management describes itself as market leading, the former NRC Commissioner characterized Oklo as “back of the pack” and unremarkable “besides a bunch of hubris.”
Liquid sodium-cooled reactors have serious reliability problems. Oklo promotes the “inherent” safety of its liquid sodium-cooled design but is not as forthcoming about the technology’s history of leaks and fires. Sodium reacts violently with water and burns if exposed to air, resulting in complex safety, maintenance, and reliability issues. A large fraction of liquid sodium-cooled reactors that have been built have been shut down for long periods by fires caused by sodium leaks. Industry experts we spoke with advised there was no reason to assume Oklo’s experience would be any different.
Massive amounts of additional capital required to fund rollout. Oklo plans to be the designer, builder, owner, and operator of its power plants, not just sell reactor designs. Citi Research estimated capex requirements of $2.7bn to support Oklo’s capital intensive business model. After a parabolic rise in share price, we view the risk of a dilutive capital raise as extremely high.
SMRs will not be a major power source for AI data centers. Data centers are generally not in the business of experimenting with technologies which lack mature operational records. The vast majority of data centers will not be powered by carbon-free baseload energy, and despite recent hype, SMRs will only play a niche role (at best) in meeting that demand. Due to execution uncertainty, Morgan Stanley estimates only 1%-3% of all incremental US data center power capacity (~2-5 GWe) through 2035 will be provided by SMRs. OKLO investors are buying into a story driven by current power bottlenecks while ignoring how inadequate unproven SMRs are for solving the problem for another decade plus (by which time access to power and data center power efficiency will likely be improved).
Company Overview
Founded in 2013 and headquartered in Santa Clara, California, Oklo is a pre-revenue nuclear energy company trying to commercialize small-scale, advanced (non-water-cooled) fission power plants it calls “powerhouses.” Named “Aurora,” Oklo’s reactors are currently being developed in two main configurations, 15 MWe and 50 MWe, with a 100+ MWe reactor in early-design phase (see: Appendix I for design features). At 15-50 MWe, ~20-100x times smaller than ~1 GWe+ conventional nuclear plant, Oklo’s reactors are technically microreactors, occupying the lower output end of nuclear reactor technologies known as small, modular reactors (SMRs).
Read the full report here by Kerrisdale Capital.
