STEM - Stem: Lowering Our 2023 Expectations - Still A Buy

2023-04-12 12:31:54 ET

Summary

• New EPA target (and IRA) will support Stem earnings growth.
• Stem's latest accounts were solid. The management is on target to achieve its 2025 goals.
• We are estimating an EBITDA positive number in the 2023 second half. We reiterate our buy rating, while lowering our internal estimates.

Here at the Lab, today we are back to comment on Stem Inc's (STEM) latest development. Since our initiation of coverage with a comps analysis with Aton Green Storage, the company did not perform according to expectations. One year later, at the stock price level, we are at -54.75%.

As a reminder, one of our investment key takeaways was due to the central role of Battery Energy Storage Systems in the Electric Vehicles space. After the EU green light on the ICE ban from 2035, the US is also moving towards the green car revolution. Albeit with rules that will be less stringent than the European ones, the United States Environmental Protection Agency (EPA), within this week should launch its proposal in agreement with the Biden administration for new rules that limit automobile emissions. This will provide the necessary step to boost Stem Inc's order backlog. Why?

According to various sources , the EPA's goal is to reach a ratio of EV cars of 1/2 by 2030, and then rise to 67% by 2032. Compared to the EU regulation, this will not perform with a real ban on combustion engines but only with rules that encourage the use of electricity. Despite that, this goal is ambitious in a country where transport is the main source of CO2 emissions, and looking at the numbers, BEV uptake represents only 5.8% of the total automotive market. To encourage the switch to electric, the US government has distributed incentives for buyers of battery-powered cars. Thanks to the Inflation Reduction Act (IRA), American citizens who buy a new electric vehicle are eligible for a credit of up to $7,500. Yet, the push from the IRA was not enough, and to reach the targets that the EPA will set, the US will have to accelerate and implement greater spending on infrastructure, including charging points for electric vehicles, which today amount to about 130,000 nationwide. According to a forecast by S&P Global Mobility , to meet these needs, the US will have to increase its EV charger number by more than eight times by 2030. Here at the Lab, we believe that US regulators will provide the necessary upside to drive Stem's earnings growth and support the company's 2025 business plan. In detail, we report that Stem aims to :

1. Grow its hardware turnover by 30% (midpoint guidance);
2. Grow its software/service turnover by 75% (midpoint guidance);
3. Deliver an EBITDA margin in a range between 15% and 20%.

Despite the negative stock price development, the company's latest accounts were solid. Stem slightly missed Wall Street guidance on 2023 revenue and EBITDA, but we should recall that management did forecast a 31% growth on a yearly basis (point 1). For this reason, we should not be surprised. To support Stem's credibility, software/service turnover that concerns Athena delivered a plus 25% on a quarterly basis and was in line with the company outlook related to the above point 2). As a reminder, Stem management had also preannounced lower top-line sales in Q4 2022 due to a Chinese supplier impacted by COVID-19. However, these shipments were pushed to the 2023 first half. Still related to this negative one-off, Stem is now guiding EBITDA profitability in the 2023 second half versus a prior outlook of Q2 2023. Therefore, looking at our estimates, we decided to slightly lower Stem's valuation. On a positive note, Q4 bookings reached $458 million and were above Wall Street guidance, and we believe that this growth was driven by IRA demand. However, we should also note that the 12-month order backlog decreased from $7.2 billion to $7.1 billion, and on a negative note, Stem management decided that they will no longer update Stem's pipeline.

Conclusion and Valuation

Going to the numbers, even if the management guided for a positive EBITDA in the 2023 second half, we are still forecasting a negative EBITDA in 2023. In detail, we derive an EBITDA estimate at minus $25 million on a yearly basis with software/service up by 75% and a new backlog of $1.5 billion. Due to lower sales and a lower EBITDA projection, we are reducing earning per-share estimate to $0.75 and $0.5 in 2023 and 2024 respectively, and as a consequence, our Stem target price moved from $20 to $16 per share. Therefore, our internal team reiterates Stem's outperforming rating given the company's strong secular demand trends for energy storage solutions. In Q1 2023, the company also announced a joint offering with ChargePoint (CHPT) that will support Stem's battery storage offering. Risk to our buy rating includes 1) higher competition, 2) battery availability, 3) regulators' policy changes, and 4) delays in software sales.

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