The stressed national electric grid is no secret and companies that provide solutions to mitigate energy and reduce dependence on the grid have been growing rapidly. One of those companies is Stem Inc. (STEM, Financial), which provides clean energy solutions and services designed to maximize the economic, environmental and resiliency value of energy assets. The company’s partners and customers include Fortune 500 corporate energy users, project developers, solar EPCs, installers, asset owners, electric cooperatives, utilities and independent power producers.
Stem’s primary platform, Athena, is an artificial intelligence-driven platform that enables organizations to deploy and unlock value from their clean energy assets, even at large scale. Other powerful applications, including AlsoEnergy’s PowerTrack, simplify and optimize asset management and connect an ecosystem of owners, developers, assets and markets. The company also offers integrated partner solutions to help improve returns across energy projects, including storage, solar and electric vehicle fleet charging.
Founded in 2009, the company currently has a market capitalization of $694 million.
Energy landscape
The company’s primary offering involves hardware and software-enabled services through its Athena platform. This platform seeks to reduce customer energy costs through time-of-use and demand charge management innovations and a network of virtual power plants, while at the same time capturing revenue through participation in various programs and merchant markets. In addition, Stem's energy storage solutions are designed to support renewable energy generation by lessening grid intermittency issues, which reduces dependence on traditional fossil fuels.
As of Dec. 31, Athena had accumulated more than 31 million runtime hours with more than 500,000 industrial internet of things devices under management across more than 200,000 sites in over 50 countries.
The two key areas in the energy storage landscape are behind-the-meter (BTM) and front-of-the-meter (FTM). An energy system’s position related to a customer’s electric meter determines whether it is designated a BTM or FTM system.
BTM systems installed at customer locations generate energy that can be used on-site without interacting with the electric grid and passing through an electric meter. The company’s BTM systems are designed to reduce commercial and industrial customer energy bills and help these customers achieve their corporate environmental, social and governance objectives.
FTM systems are grid-connected systems that deliver power into the grid, which is often sold to off-site customers and must pass through an electric meter prior to reaching an end user. The company’s FTM systems are designed to decrease risk for project developers, energy asset owners, independent power producers and investors by adapting to changing and volatile energy market conditions. The company also offers services that help asset owners and operators monitor and manage the health and performance of their clean energy assets.
Stems’s ability to optimize operations in both the BTM and FTM markets is unique in the industry.
Financial review
In February, the company reported strong revenue growth for the full year and fourth quarter of 2022, though it is still generating operating and net losses. Revenue for the quarter increased 194% to a record $156 million compared to $53 million in the prior-year quarter. Full-year revenue increased 186% to $363 million versus $127 million in 2021. Higher hardware revenue from FTM partnership agreements drove most of the increase for the quarter and the year in addition to $18 million and $58 million of revenue contribution from the AlsoEnergy acquisition.
For the three-month period, the adjusted Ebitda was -$10 million compared to -$12 million in the fourth quarter of 2021. Full-year adjusted Ebitda was -$46 million compared to -$30 million in the prior year. The negative Ebitda results were primarily driven by higher operating expenses related to increased personnel costs and continued investment in growth initiatives.
The AlsoEnergy acquisition was completed in February 2022 and was valued at approximately $652 million, which brought cash and short-term investments down from $920.8 million at the end of 2021 to $250 million at the end of 2022. Also contributing to the drop in cash levels was a burn rate of approximately $125 million during the year. Total debt and financing obligations were $527.5 million, of which $448 million were convertible notes. These notes are convertible at a strike price of approximately $29, which is substantially above current share price levels.
Valuation
The company provided 2023 guidance that calls for revenue in the range of $550 million to $650 million and adjusted Ebitda in the range of -$35 million to -$5 million. This implies 2023 will be another cash burn year. Consensus analyst earnings per share estimates are a loss of 72 cents for 2023 and a loss of 37 cents for 2024.
The stock sells at a price-sales ratio of 1.14 based on 2023 revenue estimates. That compares to a sector average of 1.32.
The average price target by the five analysts that cover the company is $9.38 per share with a high target of $12 and a low target of $5.
Guru trades
A guru that has recently purchased Stem's stock is Steven Cohen (Trades, Portfolio). Investors who sold out of their positions were Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Summary
Despite undergoing operating losses, the company has several tailwinds. These include regulatory or government policy issues that lead to more scrutiny and electricity savings as well as ongoing strong revenue growth. Headwinds include increasing competition, supply chain issues, dependance on Chinese suppliers and slower margin expansion that would lead to steady profitability.
If the company can reduce its burn rate in the next four to six quarters, it may be worth a look to long-term investors interested in the clean energy space.
