David first discussed Stem Energy (Star Peak SPAC) in the SPAC webinar here and in this blog update.the SPAC webinar here and in this blog update.
Stem Energy is an AI-driven energy storage solutions business. Stem is the first pure-play smart energy storage company to go public in the US. The addressable market for this industry is massive with a projected $1.2T in new revenue opportunities for integrated storage that are expected to be deployed by 2050. Battery storage capacity is expected to increase 25x by 2030.
With the world committed to fighting climate change, Stem is well positioned to capture this tailwind. The company has developed a commanding lead in California’s behind-the-meter (BTM) storage market, the largest storage market in the US, with a current 75% market share.
In 2019, Stem was the leading commercial energy storage installer in California with 3x the kW installed as its closest competitor.
Source: Citron Research Report
Stem has also developed a lead over competitors as the top systems integrator by disclosed commissioned projects.
Source: Stem Investor Presentation
Stem has over 900 systems operating on its Athena AI software in over 200 cities worldwide. The AI software is designed to lower energy costs, reduce carbon emissions, stabilize the grid, solve intermittency, and create VPPs and storage networks. As cumulative installs grow, Athena becomes more intelligent through continuous learning, creating more value to new and existing customers.
Athena AI optimizes time-of-use and demand charges, resulting in 10% – 30% monthly electricity bill reductions. The product saves clients’ money and helps them meet their ESG targets without changing the way they operate. Apple, Amazon, Alphabet, Facebook, Walmart, Home Depot, UPS, and others are partnered with Stem. The implication here is that some of the top technology companies in the world have validated Stem’s proprietary technology. These partnerships represent a backlog of business that should continue to drive future growth. Stem’s SaaS contracts range from 10-20 years and contain recurring monthly payments that are driven by storage assets under management (AUM).
The $2T Biden Plan to build a modern, sustainable infrastructure and a clean energy future is changing the way companies think. Globally, the US has rejoined the Paris Accord to fight climate change and Japan has pledged to reduce greenhouse-gas emissions to net zero by 2050. California has issued a mandate targeting 0 Non-EV passenger vehicles sales by 2035.
Financials
Stem has a strong balance sheet with over $525M in net cash available and $0 debt. The company is still in its infancy with $33M in net revenue for the FY 2020. Revenue is projected to grow 348% YoY in 2021 to $147M. With the way the company recognizes its sales, 88% of its forecasted 2021 revenues are from contracts that have already been executed. This means there is minimal risk that the company will fall short of its 2021 revenue target of $147M. This also speaks to the backlog for future growth that Stem already has in place.
Revenue is expected to reach $944M in 2025, which would represent over 2,800% growth from the current number. The company expects to reach adjusted EBITDA profitability in 2022 and turn FCF positive in 2023. Gross margins of 16% are expected to improve to 38% by 2025. The gross margin improvement will be driven by Stem’s increasing software revenue, which is the highest margin portion of their business (~80%). As Stem’s AUM grows, software will become a material portion of gross profit and improve the company’s margins.
Valuation
Compared to some of the other high growth SPACs in the renewable energy space, STPK appears attractively valued (comparatively) based off forward projections.
The market appears to be missing the fact that Stem is not just a hardware company, but an AI-driven software company that is leading a massive market. The software segment of Stem’s business is positioned to grow rapidly as the company’s AUM grows. This will provide a source of recurring monthly revenue and cash flow to Stem while also improving gross margins exponentially.
Conclusion
With numerous catalysts in place, the US energy storage industry is expected to grow at a 45% CAGR through 2030, the fastest of any country in the world. Stem is ideally positioned to benefit from this booming trend with its market leading technology and an impressive pipeline for future business already in place.
The top tech companies in the world have chosen to partner with Stem because their offering helps these companies lower energy costs, reduce carbon emissions, and hit their corporate ESG objectives without changing the way they function. Apple, Amazon, Alphabet, and Facebook have proven over the years that they are among the world leaders in adapting new technology. I expect other companies to follow their lead in partnering with Stem Energy.