We recently increased our allocation to Stem Energy (STPK) and we are revisiting the stock in the write-up below. I originally covered Stem Energy (STPK) in detail in early February here and later here.
On a fundamental basis, nothing has changed with Stem (STPK) since the last time I covered the company. The stock has followed the way of most all SPACs during the recent Nasdaq correction. In a risk-off trading environment, SPACs and more speculative investments with little or no revenue are typically the hardest hit. The Defiance Next Gen SPAC ETF SPAK still sits over 23% down from its all-time-high price.
SPACs have been grouped together by many investors and sold off together with no attention paid to the underlying company beneath the shell. The fact is SPACs typically have little or no revenue, so investors can easily rationalize selling these stocks first when the market environment turns bearish. That is why it is important to step back and remind yourself why you invested in these companies in the first place. In the case of STPK, we continue to have a high conviction because nothing has changed with the thesis that led to our initial investment. The only thing that has changed is the stock price as STPK has been sold off along with hundreds of other SPACs that have been grouped together in one category.
STPK has shown solid relative strength in the face off the recent SPAC sell-off, outperforming the SPAK ETF notably YTD. Below, we compare STPK’s performance to some of the most notable SPACs of 2020:
As time goes on, SPACs will no longer be categorized as just that. In the future, the underlying business fundamentals of these public companies will be the biggest factor in how the stock performs. To get to that point, these companies may need to announce real revenue and cash flows to separate themselves from the hundreds of other SPACs with lofty projections. SPACs may never recover to all time-highs as a category; however, the very best SPACs will recover and shareholders will be rewarded. The goal is always to pick the leader and this may be more crucial in a high-risk category such as SPACs. Our allocation to STPK has increased as we believe the company is fundamentally stronger than other SPACs.
As previously mentioned, investors are taking a more cautious approach to SPACs and stocks in general. For SPACs specifically, the market is taking a skeptical view that these companies can actually deliver on their projections. From the market’s perspective, these companies are in “Prove It” mode in regards to their projections. As time goes on and these companies begin to announce quarterly financials, it will become crystal clear which SPACs are actually able to deliver and which are not.
We embrace the concept of letting the financials do the talking because we are comfortable with Stem Energy’s probability of delivering strong results. Stem utilizes its proprietary AI software, Athena, to smartly store and deploy energy, resulting in 10% – 30% monthly electricity bill reductions for its clients. Athena AI reduces volatility and enables solar generation time-shifting to support local grid capacity needs. Stem currently has over 900 systems operating on its Athena AI software in over 200 cities worldwide. The company currently has a 75% market share in California’s BTM storage market, which is the largest in the US. In 2019, Stem was the leading commercial energy storage installer in California with 3x the kW installed as its closest competitor.
Source: Citron Research
Over 75 countries, including the US, have committed to net zero emissions by 2050. An additional 35% of Fortune 500 companies have made a commitment to Carbon Neutrality. These are two massive tailwinds for Stem, as management estimates there is a projected $1.2T in new revenue opportunities for integrated storage that are expected to be deployed by 2050.
Electricity production is the #2 polluter responsible for 27% of greenhouse gas emissions. Stem’s product effectively reduces its client’s electric bills 10-30% and helps them meet their corporate ESG targets without changing the way the operate.
Stem’s full revenue projections are below:
Source: Stem Investor Presentation
Stem has two distinct business segments comprised of hardware and software. Stem makes money from their hardware segment with upfront payments for initial purchases. The company is targeting 10%-30% gross margins for the hardware segment of the business.
The more profitable segment of the business is expected to be the software segment. Stem’s software segment is a recurring SaaS model secured by 10-20 year contracts with monthly recurring cash flow. Revenue is recognized ratably during life of the contract with additional upsell revenue opportunities from Athena applications. Stem is targeting 80% gross margins for the software segment of their business and is expecting the software segment to be the main driver of gross profit by 2026.
Source: Stem Investor Presentation
Stem currently has over $200M of contracted backlog and over 100% of its $147M revenue projection for 2021 already locked in. While many SPACs will likely fail to meet their estimates, we expect Stem to deliver a nice upside surprise on the $147M estimate.
After the transaction with Star Peak Energy Corporation is complete, Stem will have $525M in net cash and 0 debt to capitalize on growth opportunities. The company plans to use the majority of this cash to fund future growth while also using about 3.6% for estimated repayment of debt.
For a more detailed report on Stem’s business, I first covered the company in detail here and again in late February here. Jim Cramer, who has been critical of the SPAC market in general, has recommended STPK as 1 of his top SPACs to own for the future.
Stem has a solid management team that includes former executives at First Solar, General Electric, and Siemens. CEO John Carrington worked as General Manager and Chief Marketing officer at General Electric for over 16 years where he led global innovation, new technology efforts and product strategy. In total, Stem has 145 employees and a management team with former leadership experience at technology, energy, and industrial companies.
Stem has a list of clients that includes Apple, Amazon, Google, Facebook, and Walmart and a backlog of contracts that will drive future growth beyond 2021. We believe Stem is positioned to win many more contracts in the future as renewable energy becomes a bigger part of the economy. In my last report covering Stem, I wrote the following:
“There remains a great deal of untapped potential for energy efficiency improvement through implementation of new technologies. Stem is ideally positioned to be an industry leader in the energy storage market as more companies follow the path that Apple and Amazon have already taken.”
This remains true despite short-term price movements in the stock. We believe Stem is one of the best companies to go public via the SPAC method and has a very bright future ahead of it. We remain bullish on the name and bullish on the renewable energy industry. We look forward to the company releasing financials because we are confident it will serve as validation for our investment.
Due to SPACs being volatile in nature, we lean heavier on technical analysis and only buy at key levels. Knox Ridley will update readers as he enters new tranches in this company.