SUBSPAC

A Stem of Fine Grapes

The Rundown (6/22/21)

Hello Friends,

As we start off a new week, it’s high time I remind you guys that you don’t have to trade Dogecoin 24/7. Right now, I sense a lot of angst in traders not immediately making a profit on their trades. If you have genuine conviction in a medium to long term trade, just relax and have a nice glass of Sauvignon Blanc.

This week, we’re covering one of my favorite energy plays, Stem. A genuine gamechanger, and one of the SPACs that will survive a sharp downturn in the market. As always, if you learn something or if you have a question, leave a comment.


Start your week off with some Free Wine.

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Stem Inc is Leveraging Sustainability for Growth

Stem is primarily in the business of supplying smart battery storage to commercial, industrial and corporate customers who are focused on renewable energy. Central to the company’s plans is its AI-driven battery optimization software Athena, which is bundled along with the company’s hardware. 

Business Model

Stem gives businesses the advantage of lower energy costs. With the company’s smart battery storage unit, along with AI Athena, the company is able to reduce costs for its customers. These batteries are able to store energy during the time of low, thereby reducing rates which can be used during peak times.

Athena optimizes electricity bill costs and reduces expenditure by 10-30% while also reducing the volatility and supporting local grid capacity needs. 

The shift towards carbon neutral energy consumption by many countries will be key to the company’s Business model. Industry trends show that even corporations are taking ESG initiatives seriously with 35% of the Fortune 500 companies committing yo carbon neutrality. 

This includes behemoths like Apple and Amazon, whip have ramped up efforts in recent years. Since renewable energy like Solar and Wind primarily use batteries to store and discharge energy, it is likely that the company will have a wider customer base in the future. 

Product Strategy 

Stem focuses on sourcing its batteries from the cheapest manufacturer, with gross margins for hardware ranging between 10-30%. But significant margin improvements are likely to come with the company’s recurring revenue from Athena. The company is a market leader in California with over 75% market share in battery storage technology. This is especially great for the company, considering that California currents for over 50% of the renewable energy market in the US. 

The main advantage with Athena is that it uses a recurring SaaS model, with over 80% gross margin and an impressive 100% attach rate which is secured by long term contracts spanning between 10-20 years. Furthermore, the company can additionally upsell revenues from other applications connected with Athena. The company also has the advantage of a first mover in the market with its AI platform operating in 40+ utilities, 5 grid operators and 20 million runtime hours. 

Large-Scale Energy Storage Is The (Virtual) Power Plant Of The Future

The third revenue stream for the company is Market Participation, where the company stores excess energy generated and prevents energy clipping. Market participation is expected to increase proportionally to the company’s customer base and with 80% gross margins, it is sure to be an important source of revenue in the long run. 

ESG Credentials will Boost Sales 

Policy tailwinds are expected to be a key factor when it comes to energy deployment around the world. One of the key points in the US agreeing to rejoin the Paris climate accord includes achieving net-zero emissions by 2050.  A key trend by government officials has been to focus on transforming the energy mix to reduce the dependence on traditional fossil fuels.

With over 254 GigaWatts of capacity expected to be deployed over the next decade, much of it is expected to be through renewable sources which require battery storage solutions. US and China, the current leaders in renewable energy, will be the key drivers of growth with a CAGR of 45% and 41% through 2030. 

The market for battery store technology is also expected to grow significantly, with requirements growing by 25x in 2030. Solar is now the most efficient and cheapest source of energy, even compared to Coal. Battery technology has also seen a fall in price and is more economical to produce.

For instance, smart battery storage will cost $117 by 2020, which is a 51% reduction in cost compared to 2018. These meaningful technological advances indicate that there is a growing market opportunity for the company with a Total Market of $1.2 Trillion by 2050. 

Financials and Balance Sheet 

The company has strengthened its balance sheet in recent quarters using its proceeds from the SPAC merger. The company now boasts $500 million in cash and zero debt, which will support the credit requirements to convert large projects in the pipeline. The company is expected to further save money through its flexible supply chain and fixed capital requirements. The company’s deal pipeline now stretches to over $221 million and is expected to grow as it continues its rapid expansion to international markets.

Stem generated $33 million in annual revenues, but is projected to grow rapidly over the next few years to reach $1 billion in annual revenue by 2026, Management expects Athena and Market Participation to contribute more prominently from 2023, signalling an improved margin mix and the shift to a recurring revenue stream. The growth of the company will depend on how quickly governments and corporations switch to clean energy in the future. 

The company currently boasts a market cap of $4.17 billion and with FY21 revenues expected to be around $147 million, the company is currently trading at 28.3.x Price/Sales. While the current valuation is a slight premium, the company has the first movers advantage, allowing for significant growth and expansion in revenues. Compared to other companies in the clean energy space like Blink Charging and ChargePoint, Stem boasts a significantly lower valuation with a larger addressable market and better moat. Stem is also likely to boast higher margins in the future and be more profitable compared to other companies in the space. 

Conclusion 

Stem is expected to significantly grow over the next decade with growing demand for energy storage by renewable energy companies. Renewable energy like Solar and Wind are expected to gain market share both in the US and Internationally over the next few decades, as policymakers switch their focus to reduce dependence on fossil fuels. Battery storage technology will stabilize the grid and save costs by capturing energy at off-peak times.

Stem is in an excellent position, with ample liquidity on its balance sheet and zero debt, enabling it to have significant runway and execute all contracts over the next few years. While the company current revenues are hardware dependent, the ancillary SaaS model, with a high gross margin and long term contracts should significantly improve the bottom line in a few years. While the company’s valuations are currently expensive, significant revenue improvement through long term contracts with high gross margin Services, should enable the company to catch up to the current valuation. 

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