FLNC - Fluence Energy: Poised For Growth In The Evolving Energy Storage Sector

2023-11-06 07:13:41 ET

Summary

• Since July, Fluence Energy stock has lost 31.72% in value and has increased negative sentiment with rising short interest.
• The company expects to be Adj EBITDA positive in FY 2024 and has a strong cash position of $416 million.
• While cautious of increased global competition from China, FLNC is a top storage provider in the US market and well positioned for growth.

Since my initial article on Fluence Energy, Inc. ( FLNC ), the stock has seen a 31.72% decrease in value, accompanied by a rise in negative sentiment marked by a 19.77% in short interest. However, amid these market challenges, the company has consistently enhanced its financial performance, notably improving its top and on route to produce positive earnings. Projections for FY 2023 and FY 2024 indicate a strong path forward, reinforcing my positive stance on this leading storage provider. Positioned as the foremost storage leader in the USA, Fluence has US-based manufacturing facilities ready for a multiyear contract with AESC and will benefit from the Inflation Reduction Act, showcasing its adaptive strategies in response to market changes.

Despite the escalating industry competition, particularly from expected Chinese rivals with competitive pricing, the company remains on a growth trajectory. It anticipates reaching positive Adj EBITDA in FY 2024 and potentially breaking even in the next quarter. With a strong cash reserve of $416 million in Q3 FY 2024, it's well-positioned for continued expansion. Revised FY 2023 guidance and an expected 30-40% revenue growth in FY2024 further underline its potential. Hence, I maintain a bullish outlook on the company.

Fluence's Company updates

In my previous article , I gave an overview of Fluence Energy. It operates across two critical domains: designing and marketing cutting-edge battery storage hardware alongside state-of-the-art software and services for energy storage and grid management. Their flagship software products, Nispera and Mosaic, use AI to optimise energy injection into the grid and manage assets for energy production.

The Fluence Cube is their modular hardware system, adaptable to different storage needs, currently using lithium battery tech from China, with plans for European and US production in 2024. Notably, Fluence has secured its position as the top storage provider in the U.S. market, commanding a significant 22% market share based on installed capacity. The company operates globally, covering 47 markets and boasting over 7 GW of energy storage assets contracted and deployed.

The company's strength is derived from a formidable joint venture between Siemens ( OTCPK:SIEGY ) and AES ( AES ), bolstering their global scale and supply chain advantages. Fluence's business model thrives on hardware sales and recurring revenue from services and digital ventures. The company's investments in engineering and innovation afford significant profit potential, particularly within its digital software and services.

Future outlook and growth prospects

Fluence's recent battery cell supply agreement with AESC marks a significant milestone. This strategic collaboration positions Fluence advantageously in the U.S. market, offering an energy storage product expected to qualify for a 10% ITC bonus , owing to its use of domestically sourced content. Looking ahead, Fluence is poised for remarkable growth. Forecasts indicate immense potential in the utility-scale storage market, estimating annual additions to hit 158 GWh by 2030, a stark contrast to Fluence Energy's current cumulative deployed and contracted amount of 12 GWh. Their updated FY 2023 revenue guidance ranging between $2.0 - 2.1 billion, coupled with an anticipated Adjusted Gross Profit in the range of $117 to $132 million, paints a promising picture. With a pipeline reflecting over $1 billion in growth quarter by quarter, Fluence anticipates a robust 35-40% surge in revenue for FY 2024.

Financial updates

Since my last update, the TTM revenue has risen from $1.6 billion to $1.98 billion, showcasing a notable improvement. The TTM gross profit has also seen an increase, climbing to $79.8 million from $57 million. The company's operations thrive on hardware sales and recurring revenue from services and digital business. Additionally, the company is in the process of phasing out its legacy Low Margin Contracts, indicating an anticipated continual enhancement in gross profit margins.

When we examine the YoY quarterly EPS outcomes, it's evident that earnings have been on an upward trajectory, though they persist in negative territory. However, the guidance for FY 2024 signals an optimistic shift towards positive earnings, which is understandably a desirable prospect for investors eyeing a growing business.

Analysing the Balance sheet underscores a robust financial position, with a healthy cash reserve of $416 million as of Q3 2023. Notably, there has been a consistent increase in the total cash balance, surging by over $30 million quarter over quarter. This cumulative figure indicates healthy liquidity and a sustained and strengthening financial foundation.

Valuation

Fluence Energy currently trades below its average price target of $31 and is rated as a 4.1 Buy by 25 Wall Street analysts. The stock is known for its fluctuations, typical of a green energy stock influenced by geopolitical factors. Recently, green stocks experienced a downturn due to prolonged high interest rates overshadowing government policies supporting the sector. Compared to peers like Stem ( STEM ), Tesla ( TSLA ), and Wartsila ( OTCPK:WRTBF ), Fluence stands as the most undervalued stock with a price-to-sales ratio of 1.11. Despite a modest gross profit margin of 4.01%, it shows remarkable YoY revenue growth at 110.30%. Notably, while the margin may be relatively low, it surpasses its direct competitor Stem, which only maintains a margin of 1.86%.

Risks

There is always a risk in investing in a company that has yet to produce profits. Furthermore, the battery energy storage market in mainland China soared by 400% in 2022, propelling local companies to global prominence while intensifying international competition, notably from highly price-competitive Chinese offerings expanding globally. A surge in battery manufacturing aimed at energy storage systems may lead to oversupply and heightened market competitiveness. The widening price gap between Western and China-based BESS integrators highlights a potential new challenge: while global battery supply slightly eased in 2023, a shortage of transformers emerged, impacting grid connections due to supply constraints and significant lead times exceeding a year for transformers of all sizes. These shifting market dynamics pose challenges and could impact Fluence Energy's financial position and market share.

Final thoughts

Fluence Energy leads the dynamic energy storage sector, poised for significant growth despite heightened competition, especially from emerging Chinese rivals. Anticipating positive FY 2024 Adj EBITDA and potential breakeven in the next quarter, backed by a strong $416 million Q3 FY 2024 cash reserve, it's well-positioned for expansion. Revised FY 2023 guidance and an expected 30-40% revenue growth in FY 2024 reinforce its promising outlook, maintaining my optimistic and bullish stance on the company's future.

For further details see: