Stem Is Not At Its Summit
Summary
- Stem has not been spared from the recent SPAC bubble, currently down 48.2% from the highs of $49.97 in mid-February.
- The mutually-beneficial relationship between EVs and battery electrical storage systems enables rapid growth of sustainability and green energy.
- Stem is at the forefront of the hottest sector in this decade.
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Stem is an Institutionally Recognised, Long-Term Winner
Despite relatively high valuations, Stem (NYSE:STEM) is still undervalued, especially so in the mid to long term, when taking into account growth opportunities both in the current battery energy storage systems (BESS) market and potential expansion into the residential market. Investors should scrutinise the following three aspects:
- Earnings: Stem's earnings projections, and Stem's ability to live up to them.
- Market growth: Overall rate of growth of energy storage systems, as well as the electric vehicles market due to its correlation with the former.
- Legislative support: Joe Biden's green infrastructure plan's approval and general acceptance, as well as the implementation and execution phase.
The energy storage market is projected to increase fourfold in the next two decades, and Stem is spear-heading this rapid adaptation. Before its reverse merger, the SPAC Star Peak Energy Transition Corp (Previously NYSE: STPK) had amassed a current 73% institutional ownership. This includes General Electric (GE) and Singapore's government investment arm, Temasek Holdings. The business merger between Star Peak Energy Transition and Stem, an AI-energy storage solutions company, recently took place on 27th April 2021.
(Source: Stem Investor Presentation, Page 15)
The Symbiotic relationship between Electric Vehicles and battery electricity storage systems
It is an axiomatic truth that plug-in hybrid electric vehicles (PHEVs) and electric vehicles (EVs) are taking over, and exponential growth would not be a surprise. This can be attributed to multi-governmental policies such as direct subsidies. Furthermore, structural changes including long-term zero emission policies, such as Joe Biden's promise of 100% clean electricity by 2035, and net zero emissions by 2050. Included in the green plan is $350 billion worth of investments into green infrastructure, including EV grid storage.
The reason EVs were brought up was due to the high correlation and mutual dependability between them and battery energy storage systems. Essentially, BESS provides for EV fast-charging abilities for grid-constrained areas (by storing energy in batteries) and prevents high demand charges during peak usage.
Explanation: Stem provides BESS integrated with AI and machine learning technology. They reduce costs for its customers by maximising time-of-use rates - stockpiling energy during time of low rates, to be used when demand and prices are high, while bypassing tariff structures during peak usage. Linking back with over 250 million EV on the road by 2030, countries with large electric vehicle adoptions such as China, US and EU might experience 4-10% increase during evening peak demand for EV charging. Therefore, by utilising battery energy storage system technology, these countries would not only be able to balance supply and demand using stored energy, but also prevent users from paying high electricity prices during these hours.
Source: Global Electric Car Stock, IEA, 2020
A Brief Summary of the Stem Team and Business Model
Stem is currently being led by its CEO and director, John Carrington, with a total of 25 years in technology, energy and industrial companies, 16 of them being in General Electric as the Chief Marketing officer in charge of new technology efforts and product strategy. On top of this, he was executive VP of First Solar, where revenue grew from $500 million to more than $2 billion.
Source: Stem Investor Presentation 2020, Pg. 20
Stem is essentially a smart energy storage system company, which takes ESG in mind and hails upon their Athena AI system to optimise demand changes, resulting in 10%-30% of energy bill savings.
The hype and subsequent increase in price action of Star Peak Energy came largely from the software portion of Stem's business model. However, be wary that currently over 60% of Stem's projected revenue contribution is expected to come from the hardware and network aspect of their service, and a recurring 30% from their Athena AI software itself.
Current Fundamentals of Stem
Stem is banking on climate change to be an issue which corporations can't shy away from any longer, resulting in green regulations and the large-scale adoption of energy-saving technology and BESS over the next decade. But does this explain their high-reaching revenue projections over the next 5 years?
Source: Stem Investor Presentation, Pg. 29
From FY2021 to FY2022, Stem expects a 68% increase in cumulative assets under management (MWh), and an even more ambitious 348% in revenue growth over the same period. Fortunately, to provide some peace of mind to investors, Bill Bush, CFO of Stem, came out on mid-March stating the "four-fold expected increase in our 2021 revenue, [is] 100% covered by our contracted backlog.”
Coming to valuations, with 135 million shares representing 100% of Stem ownership, the current pro forma market capitalisation of stem is $3.5 billion, with 28.3% representing Stem public shareholder equity, 43.4% of Stem equity (common and preferred equity, warrants and units), 16.6% from private investments in public equity (PIPE), 7.1% from sponsor ownership, and 4.6% in Stem management ownership.
In order to establish a basis for comparison, a few of Stem's competitors in terms of sustainable infrastructure should be brought to stage. This would include SunPower (NYSE:SPWR), a solar power generation and energy storage company, and ChargePoint (NYSE:CHPT), providing EV infrastructure and charging points. Taking the pro forma $3.5 billion valuation, and subtracting short-term notes and advances, while using Stem's 2022 revenue projections, the EV/revenue of Stem would be 12.7 in 2022. This can be compared to the EV/revenue ratio of 2.27 and 12 for SunPower and ChargePoint respectively. It can be seen that green energy has a rather large variant of ratios, with Stem hovering towards the upper end. This should not come as a surprise, and the underlying reason could probably be attributed to the uncertainty of future earnings relative to Stem's projections, as well as the lack of analyst coverage due to it being publicly traded only recently.
Potential Expansion into Different Market Segments
Stem currently caters for corporations and industrial facilities, but there lies a significant unaddressed market for energy storage systems: residential units, which account for 21% of total energy consumption in the US. However, the market for industrial ESS might be cornered by existing veterans including Sunnova (whose ex-director, Michael C. Morgan, is Stem's current chairman), which started in 2012 and IPOed in mid-2019 and whose business is solely reliant on the residential side of solar and battery storage installations. Sunnova has coverage in over 24 states, with energy service being implemented in over 116,000 homes. Despite this, there are over 140 million homes in the US with a 64% owner-occupied housing unit rate; as such, Stem could potentially break into the residential market in the coming years, especially with its recent PIPE and cash holdings.
Is Stem's Athena Software Really Worth the Hype?
It seems somewhat of a letdown recalling the fact that a mere 30% of Stem's revenue is attributed to the state of the art Athena software. Despite this, Stem projects that as their assets under management grow, "software becomes a material portion of gross profits." This could be attributed to the recurrence of payments for Stem's patented Athena AI and machine learning technology. The adoption of such green electricity storage systems is subjected to the level of acceptance and immediate need for such energy-saving technology, further fueled by the presence of global warming and green legislation. Investors should be cautious about future earnings, and place extra scrutiny in evaluating the overall market acceptance of smart energy storage systems. Stem is spearheading the battery energy storage systems market and is definitely a long-term winner.
This article was written by
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