STEM - Stem: Trading At All-Time Lows Despite Growing Margins And Revenue

2023-03-21 11:05:16 ET

Summary

• Stem, Inc. is down 40% over the past year despite improving margins and growing revenue 180% annually.
• Sentiment towards high growth tech businesses seems to be near decade highs and may offer good entry points for names like Stem for long-term investors willing to average down.
• High debt and cash burn could present further short-term downside as Stem does trade at a premium to peers at current prices due to their high growth mentality.

STEM Is A Buy At All Time Lows

Stem, Inc. ( STEM ) is a California based technology company that specializes in providing energy storage solutions. The stock has come down significantly since we last covered them almost two years ago during the SPAC craze. With the rise of renewable energy sources and the increasing demand for energy storage, Stem, Inc. has positioned itself as a leader in this growing market. Investing in Stem, Inc.'s stock at these discounted levels can provide investors with the opportunity to profit from the growth of the energy storage market and the company's continued success. The company has the potential to provide a CAGR of around 30%+ revenue growth over the next ~4 years despite trading at just a 1.6x forward price to sales. The company has the cash runway to pull through to profitability (Figure 1) and become successful and additional national energy incentives would be a cherry on top.

Figure 1. STEM has the potential to be consistently putting up positive earnings by the second half of this year

Furthermore, the company is also expanding its reach through partnerships and new initiatives. The stock is undervalued below $10 and is a buy with strong growth projected to be ahead. Stem's AI storage technology, Athena, is not getting the credit it deserves as it holds one of the largest solar storage data bases in the world. The company has a strong growth trajectory, with revenue expected to increase from $362 million in 2022 to over $1 billion by 2025. In addition, Stem is a buy with a strong value proposition. The company is trading at an estimated 2026 forward PE of just 13x earnings , which is a discount to its exceptional growth rate. Earnings are expected to grow at a compound annual rate of ~50% over the next five years. Overall bottom line: Stem is a buy with strong growth projected to be ahead as a leader in the solar storage sector if more favorable macroeconomic trends can resurface.

Recent News & Forward Valuation

Stem, Inc. has recently announced several new partnerships and contracts that demonstrate its commitment to growth. The company has partnered with several leading energy companies to bring its innovative energy storage solutions to a wider market, creating a dominant west coast force. In addition, Stem, Inc. has secured several large contracts to supply energy storage systems to both residential and commercial customers with a backlog pushing close to a billion dollars. These developments are a positive indicator of the company's future success and provide investors with additional reasons to consider investing in Stem, Inc.'s stock at these prices. The company's valuation currently hovers around a $1 Billion market cap or a ~1.6x price to sales ratio, not bad for a company that saw well over 100% revenue growth last year. Stem's closest competitor would likely be Fluence Energy ( FLNC ), who trades at a slightly discounted value to Stem but offers slower growth rates (Figure 2).

Figure 2. Stem offers a higher valued faster growth opportunity to peer Fluence Energy

Stem will need to continue to deliver industry leading growth to hold this premium valuation as well as improve gross margins to push towards profitability and reduce investor risk ( Figure 3 ). Stem's other competitive advantage to Fluence is Athena's AI capabilities which will help provide wider long-term margins for Stem in our opinion.

Figure 3. Stem increased gross margins very well YOY and will need to continue to do so to be successful going forward

The company's cash on hand does not look to be a major issue with over $250 million available as cash and short term investments as of last quarter (Figure 4) and a declining cash burn of ~$30-$40 million per quarter would give them as much as 2 more years of a cash runway before this would become a significant issue. Earnings calls should be monitored to ensure gross margin expectations are being reached as this would be the one unlikely issue that could arise is if the company is not as profitable as they believed to be as they continue to scale and in turn cash burn becomes worse than expected.

Figure 4. Cash burn for Stem gives them around 8 more quarters at the current rate before additional funding would be needed if still unprofitable

Risks

As with any investment, there are always risks to consider. One of the main risks with investing in Stem, Inc. is competition from other energy storage companies. As the energy storage market continues to grow, more companies are entering the market and competition for contracts and customers is increasing. Stem combats this by working to standout with unique partnerships and growing artificial intelligence capabilities. Additionally, the energy storage market is still relatively new and there is a risk that new technologies could emerge that render Stem, Inc.'s solutions virtually obsolete. Solar currently looks to be a better option to hydrogen fuel cells and provides easier entry than wind energy. Investors should carefully consider these risks before investing in Stem, Inc.'s stock.

Other considerations should be made by looking at cash on hand and debt. Stem has around $250 million in cash on hand along with $500 million in long-term debt. As discussed in the prior section these values do not look to pose major risk but should be monitored quarter to quarter. Stem also recently disclosed they had minor expos ure to Silicon Valley Bank. This could have a small impact (>5%) on these metrics going forward. Downside risk in Stem is still likely until macroeconomic environments return to favor for tech & growth businesses. Average down techniques at these levels allow for a competitive entry into Stem, Inc. stock.

In Conclusion

Despite these aforementioned risks, investing in Stem, Inc.'s stock can still provide investors with the opportunity to profit from the growth of the energy storage market. With its strong partnerships and recent contracts, Stem, Inc. is well-positioned to continue its success and provide investors with long-term returns on their investment. Additionally, the growing demand for energy storage solutions and the increasing use of renewable energy sources make Stem, Inc. an attractive investment for those looking to invest in a company that is at the forefront of these trends. We like Stem opposed to Fluence energy due to their unique differentiators (Athena, Changepoint JV, etc.), but both have potential for further downside. In conclusion, investors should carefully consider both the risks and opportunities before making any investment decisions, but investing in Stem, Inc.'s stock can provide investors with a valuable opportunity to profit from the growth of the energy storage market. Very few sectors will see the growth that is expected in the solar energy storage area over coming years. Stem offers the opportunity to get in on these returns at a discounted price near all-time lows. Fear is at decade highs in the high-growth tech space and this presents potential for long-term gains in names like Stem for investors with a high propensity for risk.

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