Nuclear Focused Constellation Energy's 25% Price Drop Changes the Buy Equation, But Not Enough

Key Points

• Nuclear power is in the middle of a renaissance as electricity demand from AI has exploded.

• Constellation Energy is well-positioned in nuclear, but Wall Street’s fascination with the power source has faded.

Constellation Energy (NASDAQ: CEG) is in the middle of its own bear market, with its stock down 25% from its 52-week high. The company has been making some big moves, expanding its business and inking important power supply deals. The problem is a shift in investor sentiment. But for most investors, the recent negativity around the stock probably isn’t bad enough to make it a buy.

Constellation Energy sells power

Unlike a regulated electric utility, Constellation Energy sells power on the open market. That is good if demand for electricity is material, since the company can charge what are likely to be attractive market rates. The world is increasingly using electricity, with huge demand coming from technologies like electric vehicles and artificial intelligence. Electricity demand is, indeed, strong right now, and it is expected to remain strong for years to come.

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Image source: Getty Images.

Constellation Energy is in a good position. Adding to the allure is the company’s large portfolio of nuclear power assets. Given that nuclear power doesn’t produce greenhouse gases, it is a clean energy source. Tech giants like Meta (NASDAQ: META) have been inking deals with Constellation Energy to gain access to its clean nuclear power. Nuclear is going through a renaissance, leading investors to bid up the price of companies like Constellation Energy.

Meanwhile, Constellation Energy has broadened its portfolio with the acquisition of Calpine, an electricity generator that largely uses natural gas. Constellation Energy is now a bigger and more diversified business and even better prepared to meet the growing electricity needs of its customers. From a business perspective, Constellation Energy is very attractive.

Nuclear is less hot than it was

However, investor enthusiasm for nuclear power stocks has cooled off a bit. That’s a big part of the 25% drawdown that the stock has experienced. The stock is, indeed, cheaper than it was, but it still isn’t particularly cheap. For investors who care about valuation, however, it probably won’t be worth buying. It is still up 40% over the past year and nearly 300% over the past three years.

Looking at traditional valuation metrics highlights the problem even more. Constellation Energy’s price-to-sales ratio remains twice its five-year average, even after the decline. The price-to-earnings ratio is 40x, which is very high on an absolute level. In fact, it is even higher than the roughly 32x P/E of the average technology stock.

Good business, not so good price

Even a good business can be a bad investment if you pay too much for it. That looks like the situation with Constellation Energy right now. There are only two ways to remedy this. Either the stock can fall until the valuation is more reasonable, or the business can grow into the current valuation, which would likely mean the stock price remains stagnant. Neither option is a great outcome for investors.

This is a stock you may want to keep on your wish list, but there’s no particular reason to rush out and buy it right now.

Should you buy stock in Constellation Energy right now?

Before you buy stock in Constellation Energy, consider this:

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy and Meta Platforms. The Motley Fool has a disclosure policy.