STEM - Stem Stock Is Falling but Its First-Mover Advantage Is Worth Remembering
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Back in December when stock markets could not get enough special purpose acquisition companies (SPACs), Stem (NYSE:STEM) stock rallied to new highs.
The euphoria dissipated within two months of 2021.
STEM stock, a way to play the artificial intelligence-driven clean energy storage system, didn’t do enough to prove its worth.
The business combination of then-named Star Peak Energy Transition was $1.35 billion. As STEM trades around $20 after peaking at nearly $50 in February, the market is reevaluating the post-SPAC company’s transaction value.
What is STEM worth? Let’s take a look.
STEM Stock Looks Volatile
After the stock’s ticker changed from STPK to STEM, the share price remains volatile. Citron Research, which is best known for short-selling calls, posted a $100 price target on the stock in January.
The firm cited the disruptive leader as having more than a $1 trillion total addressable market (TAM). The bad news for hopeful investors is that TAM is an estimate. The market is highly competitive and is constantly changing. The TAM may shrink as more companies vie for a piece of the pie.
On its “About Us” page, STEM claimed it had identified several trends of interest in the electric vehicle space. Identifying companies that have a business strategy likely to benefit from the energy transition implies a large TAM ahead. Star Peak supplied the liquidity to get the company started.
At a fireside chat on April 27, the company focused primarily on the merger and investment highlights. It discussed using smart batteries in power infrastructure.
The skeptical investors should ask what STEM will offer that current utilities are not. For example, Vistra (NYSE:VST) pays a dividend that yields around 3.5%. The stock trades at a forward price-to-earnings ratio of below 10 times.
Dominion Energy (NYSE:D) is a multi-billion company by market cap and pays a dividend with a similar yield.
Buying STEM stock now is a leap of faith. The company plans to capitalize on the power grid shifting to renewable sources. Yet the established utilities will also embark on a clean energy shift. Those firms have an existing business that generates healthy free cash flow. They will re-invest the cash generated to renewable solutions.
Opportunity With Smart Energy Storage
Intermittent electricity generated from wind and solar energy farms is problematic. The grid will need a smart energy solution to collect that energy. STEM supplies smart energy battery storage already. It has over a decade of pioneering the experience of AI-driven energy storage, as described here.
STEM’s Athena Smart Energy software promises to give customers more value from their energy investments. The company has more than 950 projects operating or contracted with Athena. Around 1 GWh is under Athena management generating more than 20 million runtime hours.
In its investor presentation on Jan. 2021, the company identified $1.2 trillion in new revenue opportunities (or TAM) for integrated storage. Since this will be deployed by 2050, the full upside potential for STEM will take 30 years. Furthermore, by 2030, battery storage capacity will increase by 25 times.
STEM will capture much of the market by being the first mover AI platform. Thanks to a net cash balance of around 525 million, it will target the high growth markets first.
Its forecasted upside is fully financed, so it is unlikely to disappoint investors in the years ahead. According to its hardware deliveries forecast (slide 28), STEM stock will post hardware gross margins of 10-30%, software gross margin of 80%, and market participation gross margin of 80%.
Your Takeaway
Forecasting revenue growth of 51% CAGR from 2021 to 2026, STEM shares look very compelling. The company is an AI, software, and clean energy battery play all in one.
It has dozens of customers in the utility space (as slide 11 shows). This includes Alliant Energy, Duke Energy, and Avista. Investors may bet safely that Stem will deploy the most storage capacity in the foreseeable future.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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