Opower - Successful Public Offering Still Has A Lot To Prove

Apr.18.14 | About: OPOWER, Inc. (OPWR)


Successful debut of a very interesting business.

Billion dollar valuation for not so transformational product.

Remain cautious, Opower has a lot to prove.

Opower (NYSE:OPWR) went public at the start of the month. The provider of cloud software for the utility industry enjoyed a successful public offering.

Despite this initial success I believe the company has a lot more to demonstrate before it can justify the current billion dollar valuation in this enormous growth market.

The Public Offering

Opower delivers customer-facing applications aimed to reduce energy demand. The company's software analyzes energy data and presents personalized insights in order to reduce energy consumption.

While this seems to be disadvantageous to utilities, note that in general these companies are under regulatory and political pressure to build fewer plants and use cleaner sources of fuel while keeping rates low and reduce peak energy demand. Initiatives to reduce demand at peak hours is therefore actually advantageous for utilities despite reducing overall demand.

Opower sold 6.1 million shares for $19 apiece, thereby raising $116 million in gross proceeds. All of the shares in the offering were sold by the company with none of the shares being offered by selling shareholders.

The offering took place at the high end of the preliminary offering range as bankers and the firm sought to sell shares in a $17-$19 price range.

Some 13% of the total shares outstanding were offered in the public offering. At Wednesday's closing price of $21.32 per share, the firm is valued at $1.02 billion.

The major banks that brought the company public were Morgan Stanley, Goldman Sachs, Allen & Company, Pacific Crest Securities, Canaccord Genuity and Cowen and Company.


Opower operates in a large growth market with utilities already committing $11 billion to energy efficiency in 2013 thereby addressing regulatory and customer challenges. Opower's software is trying to lower energy usage of low-tech and hardware intensive products which use excessive energy through the use of mail, web, and phone alerts through behavioral mechanisms.

For the year of 2013, Opower generated revenues of $88.7 million which is up by 71.4% compared to the year before. Net losses increased modestly towards $14.2 million.

Before the IPO took place Opower already operated with nearly $29 million in cash and equivalents and with a little less than $4 million in debt. Factoring in $116 million in gross proceeds from the offering results in a solid net cash position of around $130 million. Of course this still values operating assets of the business around $900 million, roughly 10 times last year's revenues.

Investment Thesis

As noted above, the offering of Opower has been a success. The company priced the offering some 5.6% above the midpoint of the preliminary offering range. Ever since shares have seen more upside, trading north of $21 per share, implying gains of 15-20% from the midpoint of the initial price range.

With the market attaching a billion dollar valuation to this company it is clear that Opower has a lot more to prove. Not only is the revenue multiple very steep, the company is still reporting losses. What's important is that fourth quarter revenues continue to show rapid growth of 63.3% on an annual basis, putting annualized revenues north of $100 million. Opower's solutions are actually embraced by large global utility companies like Duke Energy (NYSE:DUK) in the US and EON in Germany.

Opower's offerings actually saved 1,900 GWh in 2013 for some 32 million consumers and businesses worldwide, allowing them to save $234.1 million in electricity. At the same time, utilities could cut back on capacity in order to meet lower peak demands.

Another comforting factor is the fact that no shareholders sold any shares in the offering, which implies that prominent investors like Accel and Kleiner Perkins Caufield remain invested in the firm.

While Opower has a lot of things going for itself I am put off by the not so transformational solutions and products and the high billion dollar valuation. I will keep the company on my radar for the coming year though.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.