Enphase: Stellar 2022 … Will It Continue? Plus Q3 Earnings

Posted on January 5, 2023June 30, 2026 by io-fund

Enphase was one of the top performing stocks in the Nasdaq last year and for good reason – the company reported accelerating revenue in 2022 across two quarters and has expanding margins. This is a killer combo in any environment but most certainly the current one where many companies are reporting the opposite, such as decelerating revenue and/or contracting margins.

Notably, because Enphase was aptly rewarded last year by awarding investors with 47% gains in 2022 compared to the Nasdaq’s (33%), the entry has proven a bit tough. As of now, our entry is flat (more or less) and it’s likely I/O Fund stops out given there could be a broader market pullback on the horizon. If so, we will try again in the future. There are details at the end of this analysis on the stop we plan to follow for Enphase.

This analysis is meant to keep close tabs on a company with an exceptional product, which is the IQ8 Microinverters, and a strong management team. You can read our most recent Enphase analysis here, and then dating back further, we covered the company in 2021 and also in 2020.

Enphase is seeking new ways to manufacture domestically to take advantage of the Inflation Reduction Act. The IRA provides a credit of approximately $43 per microinverter manufactured in the United States directly to Enphase. Analysts on the call were excited to hear about the prospect of Enphase improving it’s already-good bottom line with IRA credits.

The new policies of NEM 3.0 in California passed in December could provide a boon in Q1 for Enphase due to Enphase being a leading provider of solar plus storage. However, management has gone on record to say that it could subsequently cause a slowdown after Q1 in California because ultimately the new policies reduce the rate at which a resident can sell back power to the grid by up to 75%.

On the product side, the next iteration of microinverters will introduce gallium nitride (GaN), which increases power while maintaining the same footprint. The IQ9 series and IQ10 series will incorporate GaN and will increase MW and also greatly increase AC frequency from 100 kilohertz to up to 1 megahertz. The company is also expanding with a third supplier on batteries to achieve 250 MW hours per quarter on storage or more. Right now, Enphase ships 130 MW hours of batteries per quarter.

We discuss this and more below.

Q3 Earnings Overview:

Revenue accelerated again for the second quarter
Margins expanded, some 2X or greater from the year ago quarter
Regarding a question on the recession and potential slowdown in growth, management stated this year will have “very healthy double digit, high double digit growth percentage”
Updates on IRA and NEM 3.0 in State of CA: IRA is a serious boon for the next 10 years whereas NEM 3.0 may cause an eventual slowdown in CA revenue.

Enphase reported revenue of $634 million for growth of 80.57% compared to $613 million expected. This represents Enphase’s second acceleration in revenue this year, up from 67% last quarter and up from 46% in Q1. This level of revenue acceleration is rare in the current environment.

Guidance for Q4 revenue of $680 million to $720 million represents growth of 69.8%. Overall, analyst estimates are moving upward.

Q4 was originally estimated at $664 million and is now a consensus of $701 million.
The same for Q1, which originally had analyst estimates of $640 million compared to current consensus of $680 million.

This is important to keep an eye on as it helps Enphase defend its current valuation if revenue estimates continue to go up.

In Q3, Enphase reported GAAP EPS of $0.80 and adjusted EPS of $1.25, which beat estimates of $1.08. Enphase beat EPS estimates and analysts are raising consensus estimates for the next two quarters. Should the consensus numbers continue to go up, this also helps Enphase’s bottom line valuation.

On top of accelerating revenue, Enphase has been expanding its operating margin. In Q3, the company reported a GAAP OM of 21.4% — which is nearly double the GAAP OM in Q3 of last year at 10.6%. This is also the highest GAAP OM in 2022 with 17.8% in Q2 and 14% in Q1.

The adjusted operating margin of 30.5% is six points higher than last year’s 24.4% adjusted OM. This was also the highest adjusted OM in 2022. For next quarter, the company is guiding for 28.8% adjusted OM.

GAAP net margin of 18% is nearly three times higher than the GAAP net margin of 6% in Q3 of last year, and has also been expanding each quarter in 2022. This led to net income of $115 million in Q3.

The company reported free cash flow of $179 million in Q3 for a FCF margin of 28% and operating cash flow of $188 million. The FCF margin has fluctuated between 20% and 36% over the past few quarters. There is $1.4 billion in cash on the balance sheet and $1.29 billion in debt.

The company paid stock based compensation of $52.3 million, or 8.2% of revenue.

Key Metrics:

Enphase reports its microinverter sales by Megawatt shipments, or the total capacity of all microinverters shipped in a single quarter. Last quarter, Enphase shipped 1,709 MW DC of microinverters, or 40% QoQ, up from 1,213 MW in Q2.

Batteries were flat QoQ at 133.6 MW of hours compared to 132.4 MW of hours last quarter. However, this is up over 100% YoY from 65 MW of storage shipped in Q3 2021.

Enphase’s international mix is growing rapidly with Europe up 70% QoQ and 136% YoY. Latin America was up 100% QoQ and 129% YoY.

Fewer EV chargers were shipped this quarter at 6,370 compared to 8,250 chargers shipped last quarter.

Of the microinverters shipped, 47% were IQ8 up from 37% last quarter. There was a question about the slowing rate of growth in IQ8 inverters and the answer below discusses why the percentage is not the right thing to focus on. There was a large sequential jump in MW DC of microinverters shipped from the 1709 to 1213 MW, and therefore, IQ8 shipments nearly doubled. It was also good to hear in the answer below that IQ8 is expected to take up 90% of microinverter shipments by Q2 of 2023.

Mark Strouse

Yes, good afternoon. Thank you very much for taking our questions. I’ve got two questions. Maybe I’ll just kind of roll them into one. The IQ8, I believe you mentioned that was 47% of shipments this quarter. I believe in 2Q that number was 37%. Just kind of what drove that, that seems like a relative kind of slowing in what I would’ve expected kind of the progression over the coming quarters to be. And then the second part of that is kind of despite that relatively slowness in IQ8, gross margins are still coming kind of ahead of expectations. So just a bit more color on those two metrics please.

Badri Kothandaraman

Yes. If you see, you got to look at it a little bit carefully. It’s 37% of 3.3 million microinverters that we shipped in Q2, that’s approximately one point something in Q2, while now it is 47% of 4.3 million microinverters. So therefore, I would say, the IQ8 microinverter volume is doubled from Q2 to Q3. What we have seen historically is the transition, is complex. It can take over four to six quarters. That’s what – I mean, around four to six quarters. This is what we told you before. We started Q1 was at 20% I think or 19%, Q2 37%, Q3 47%. We expected to further climb in Q4. Our target is to get to 90% conversion in Q2. That’s what our target is. You asked a question on gross margin. On gross margin, our product mix of IQ8 was higher, like what I told you, 47%.

Net Energy Metering (NEM) 3.0 in California:

Last month, California passed controversial solar policies that will initially benefit Enphase and other solar plus storage companies because the new policies greatly reward solar systems that have storage. The new policies introduce high tariffs for high-priced evening power whereas rooftop solar systems with storage will offset these prices and potentially export power back to the grid. This was a controversial policy because it benefits utility companies by also slashing the value of solar returned to the grid by nearly 75%. Another controversial tariff is the grid participation charge, which is proposed to be $8.00 per kW, or $56 a month and $672 per year.by nearly 75%. Another controversial tariff is the grid participation charge, which is proposed to be $8.00 per kW, or $56 a month and $672 per year.

This will initially benefit Enphase as the company sells storage with its comprehensive systems, and systems installed before the new policy takes effect (mid-April) will be grandfathered into the current rates offered for selling power back to the grid.

As discussed in a previous analysis, Enphase’s microinverters use a proprietary ASIC chip to change loads and grid events, which reduces the required size of battery and battery power. The solution that Enphase designed with IQ8 is that the models are “always on” by combining the inverters, batteries, system controllers and load controllers for a mini grid that can produce power from the sun and efficiently store this power at night.

The small upside to the new policy is that over the next 9 years, residential customers can use receive credits by using the Avoided Cost Calculator (ACC) to calculate the cost a utility avoids for each kilowatt-hour that it doesn’t buy from the wholesale market. The extra credits will result in residential customers saving $100 to $136 per month on the average electricity bill. There is an additional $630 million in state funding set aside for low-income housing installations.

The reason I use the word “initially” is because solar installations ultimately fell in Nevada and Hawaii after similar policies. Per SolarBuilderMag, Enphase has previously stated the following:

“Enphase Energy states, ‘Based on data from other states, cutting (the) solar value proposition by more than half — four months from now — will lead to a deluge of installation requests in the first quarter of 2023, followed by a precipitous curtailment. This will not only fail to sustainably grow the solar market, but it also risks debilitating it, exacerbating supply chain issues, disrupting small business cashflows, and jeopardizing roughly 65,000 California solar jobs.’”

During the earnings call in October, Enphase had said the following about NEM 3.0:

“Next, I’d like to comment on NEM 3.0 in California. As of now, there is still no decision from the California Public Utilities Commission, CPUC. We hope the CPUC eliminates the grid participation charge while providing a glide path for the solar only market, as well as incentivizing the solar-plus-storage market.”

In December, NEM 3.0 passed with the new policy set to take effect April 13, 2023. Enphase had previously cautioned it will cause a spike in installations because solar + storage that is installed prior to NEM 3.0 can continue to sell to the grid at the higher rate before the policies go into effect.

Notably, Enphase plans to have an additional cell pack supplier from China early next year with a lead time of 10 to 12 weeks. This may help in satisfying any demand from customers who want to beat the April 13th deadline for NEM 3.0.

California is a large solar market with 12 GW of distributed solar generation installed, or about 25% of the state’s peak demand. There are over 80,000 customer-hosted batteries connected to the grid.

Update on the Inflation Reduction Act:

We covered the Inflation Reduction Act here in a free article in September. The IRA allocated $369 billion allocation for energy security and climate change over the next 10 years. The investment tax credit is 30% for residential solar and standalone storage, and Enphase is one of many companies that will reap the rewards.

As discussed on the earnings call, the IRA allows for $0.11 per AC watt production for the domestic manufacturing of microinverters. In response, Enphase plans to “open four to six manufacturing lines in the U.S. by the second half of 2023.”

The CFO stated the following: “We are planning to add a total of four to six lines in the U.S. At this time, we are planning that by the end of Q4 2023, so four lines, per line would be 750,000 units a quarter. Four lines would be 3 million units a quarter in the U.S., six lines would be 4.5 million units a quarter in the U.S.” According to the transcript below, Enphase will see $43 per 384W microinverter shipped. This will help expand the company’s margins of up to $193 million per quarter in additional income/IRA credits.

Note: the company is doing about 4.5 million microinverters per quarter right now so demand needs to double and/or Enphase will need to lean away from global manufacturing for the microinverters. In his answer, the CEO is clearly saying this will take time. I believe he’s also implying if all things are equal (or perhaps better with automation) this would be adding the credit to the current profile of the company in terms of costs/bill of materials considering Enphase is shipping exactly 4.5M microinverters per quarter now. Per the CEO’s answer, the variable that remains is value-added manufacturing activities, such as cutting, drilling and assembling the parts. Presumably, this would be higher global costs.

Steve Fleishman

Yes. Hi, good afternoon. Thanks. Badri, just in thinking about U.S. manufacturing, could you give us any color on what the cost difference might be in the U.S. and how much of the $0.11 that could offset in terms of just manufacturing costs here?

Badri Kothandaraman

Yes, I mean it’s too early to talk about it, Steve. But again the $0.11 per watt is the big number, if you do the economics, you see, let’s say I ship a inverter with 384 watts of AC, $0.11 a watt $43, right? And the manufacturing cost that, of course, we have the total manufacturing cost, which is bill of materials plus value added manufacturing. The bill of materials will roughly stay the same regardless of the, there may be some small changes, but if domestic content is not required, the bill of materials will likely stay the same. So therefore the variable here is value added manufacturing and how efficient the contract manufacturers can set up the factories? What level of automation they can have? How can we help in them achieving great levels of automation. That’s the question

Later on, an analyst followed up by asking a similar question. Due to the importance of the statement, I’m copying the entire transcript here:

Julien Dumoulin-Smith

Excellent. Hey, good afternoon Badri and team. Thank you and congratulations again. So just on the cost side of this equation, right, I mean I just want to make sure I heard you right on the U.S. manufacturing, I mean, how much of an incremental cost and/or incremental need from U.S. content is it required? I’m just trying to understand the relative cost under the ledger versus the $0.11 a watt that we’re talking about. I guess that you guys hold onto the $0.11. I’m just trying to understand what the offsets would be, especially considering the fact that you still have a pretty good line of set on U.S. growth and therefore being able to just serve U.S. demand from U.S. manufacturing, and avoiding logistics at the same time. So the net, net, net of the two of those, as best you understand it today, obviously considering I guess [ph] still pending,

Badri Kothandaraman

Right. So like what I said, maybe you did not hear what I said. Is the production based tax credit is $0.11 per AC watt. If we take a 384 watt micro inverter, that is $43 of credit. Now when we look at our microinverter, you have bill of materials and then you have value-added manufacturing cost, and then you have overhead, which is warranty expenses and all of those. So if you see all of those constitute the cost of the product. Now the bill of materials, assuming there are no restrictions on domestic content, expect the bill of materials to be roughly staying the same.

The value-added manufacturing cost is the one that’s the variable cost depending on the country. And then the warranty expands in logistics, freight, et cetera, largely the same because now it is local and while the cost to ship raw materials to the U.S. may increase, but the cost to ship to customers will decrease. So that is a wash. So really if you consider those three components, we need to look at one portion of that, which is value-added manufacturing.

Now our contract, it needs to be economical for our contract manufacturers as well. They also need to make, they need – they also need to be profitable. It’s not going to happen if they do not make any money. So therefore, we are working on finalizing the agreements we do have letters of intent, which we think are reasonable constructs and bottom line is with the constructs we have in mind, provided this AR [ph] implementation is approved. I think, the money to be made or the credit that we can get would be significant and it’ll create a lot of jobs, which is really what we want

Product Updates:

For the IQ9, Enphase plans to increase the power of the microinverter by 50% from 320 watts to 480 watts DC in the same footprint. This is made possible by gallium nitride (GaN), which has the thermal characteristics to withstand high power. GaN also allows a higher frequency, so what operates at 100 kilohertz today in the IQ8 will operate at 200 to 300 kilohertz on the IQ9 and 1 megahertz in the IQ10. The other major benefit is that the footprint of the transformer size will be the same despite a much more optimized system.

Here is what was said on the call:

“We are planning to utilize 1 megahertz for IQ 10, but on IQ9, we will probably be around 200 to 300 kilohertz. And then what happens is the transformer scales basically to these – to one over the square root of the increase. So that means that the transformer can come down, the size of the transformer can come down […] So that footprint can come down, the volume can come down, the FX can still be the same.

And soon there will be an opportunity, although we are not planning to do in the DC stage yet, implement again in the DC stage, there is opportunity for us to implement again in the DC stage as well. So lots of optimization possible. Name of the game is to keep the footprint the same, not bloated. Size is important for us and I think we can get the cost structure as well under control. And if we are able to pack in 480 watts AC punch into similar number of components, similar cost structure, then we directly get the cost benefit there in terms of cost per watt.”

Comments on Recession:

Due to Enphase performing so well last year on stock price, naturally there will be questions on whether Enphase can sustain this growth and overcome recessionary pressures. Although we are quoting a lot from the transcript, this particular call was 1:15 minutes and so there’s a lot cover. This part is especially important as I/O Fund is tracking some weakness in Enphase’s technicals yet we don’t want to be complacent on re-entering if Enphase has a repeat year.

Phil Shen

Great. That’s great color. Thanks, Badri. As it relates to 2023 again, but just for the general micro business I know there’s not official guidance, but was wondering if you could talk through, how does a potential recession maybe some potential for demand slowing in 2023 for resi solar in the U.S.? How could that – how are you thinking about that? Are you seeing any of initial signs of that at all? And I think you saw the 70% year-over-year growth in Europe this quarter, what kind of sequential growth could we see in Europe as we get through next year for the micro inverter business? Thanks.

Badri Kothandaraman

Yes, I mean the, you asked us, do we see any slowdown? We don’t. Our demand is very strong as we see it. It’s of course too early to talk about Q1, but even Q1 bookings are right now quite healthy. So that’s what we see today. The – there are a few factors that are in favor for us. The utility rates are continuing to climb, so that accelerates our business. The IRA, Inflation Reduction Act and the ITC extensions for both for ITC 30% ITC for solar and storage are fantastic. So those also provide a nice launch. And then for us this is not true in the U.S. but Europe, the energy crisis in Europe is accelerating renewables big time. So these are the three things where we are seeing a lot of tailwinds from these three things and our demand is strong.

And here was a second question on whether Enphase can continue its high growth rate:

Gus Richard

Yes, thanks for taking the question. Just wondering, you guys have been growing at 70%. Can you sustain that level of growth? And I’m not asking for a forecast and if not, where do you see the limits of growth coming in? Is it your installer network? Is it availability components? Could you just discuss that a little bit it’d be helpful?

Badri Kothandaraman

Right. When you start from a small base, of course the growth is going to be high. And then when you build it to some respectable numbers after that, the question is are we going to be able to sustain the growth? We think there are great drivers for sustaining the growth, which is the utility rates even in Europe, for example, in Germany are quite high. The energy crisis is accelerating in our renewables in Europe. So all of those are external drivers. They’re tailwinds that are in our favor. So we think we can sustain good double-digit growth percentages in general. But we do need to maintain a focus on quality and customer experience. And many of the installers love the quality on microinverters. And our market share gain that we have is based upon our quality plus the customer service that we provide them on microinverters.

I talked about the – some stumbling blocks on storage and we are working on them and we expect storage will be also providing a similar customer experience enabling us to unleash that opportunity as well in Europe. So we are incredibly optimistic like what I said, we doubled from 2020 to 2021. We doubled a gain from 2021 or we will double the gain from 2021 to 2022. And 2022 to 2023 it may not be possible for us to double, but we will have very healthy double digit, high double digit growth percentage.

My notes:

The levelized cost of energy has dropped exponentially over the past 10 years, which I first covered here. In the chart below, solar is to the left in orange and it’s gas comparison is in gray to the right.

Source: Lazard Levelized Cost Of Energy, Levelized Cost Of Storage, and Levelized Cost Of HydrogenLevelized Cost Of Energy, Levelized Cost Of Storage, and Levelized Cost Of Hydrogen

Here is a look at how the LCOE has dropped dramatically over the past 10 years from the same report:

The lower LCOE helps to illustrate why Enphase may do well during a recession as a solar plus storage system can drive down energy costs.

Conclusion:

The question as to whether Enphase will continue its winning streak to sustain high revenue growth in 2023 is that it’s highly probable. In addition to developing GaN microinverters, the IRA tax credit for domestic manufacturing could boost the company’s bottom line. These are catalysts to the already strong earnings performance. Management stating IQ8 will be 90% of microinverter sales by Q2 is helpful and the company is expanding its suppliers with a mix of global and domestic.

There is one caveat which is valuation. Depending on how you look at it, Enphase is testing the upper range of its 2022 valuation if we compare it to Jan-July. If you assume the price activity between July-December will repeat, then this is a good entry point. However, if we see a broader market pullback, Enphase could easily revert to its Jan-July trading history on valuation.

As with 2022, this year will require navigating the broad market for entries as much as (if not more so) than individual stock charts.

Enphase Technicals

By Knox Ridley

Enphase appears to be in the final move of a large uptrend that started in January of 2022. The current drop has gone further than anticipated. This has reduced the probability that we should see a final push towards the high $300s before putting in a major top.

This now opens the door to us being in the first move down in a large degree drawdown. The line in the sand will be the $245-$237 support zone. If this breaks, we will stop out of our position and wait for this large degree drawdown to complete.

However, it is much more likely that we see a bounce back towards the $282-$304 region before a major breakdown, if this is the scenario in play. What will be the major clue is the structure of this bounce. If it is a clear 5-wave move, then we will favor blue, and hang-on as we push to new highs. If it is a 3-wave bounce, we will look to unload our position for a modest gain in the yellow box above and re-enter at a future date.

Solar Stocks Lead The Market This Year As Energy Crisis Heats Up

Posted on September 14, 2022June 30, 2026 by io-fund

This article was originally published on Forbes on Sep 9, 2022,02:02pm EDTForbes on Sep 9, 2022,02:02pm EDT

Solar energy stocks have outperformed the S&P 500 Index YTD with the most noticeable divergence June-August. The S&P 500 index is down 17% YTD and Nasdaq-100 index is down 26%, yet solar stocks are leading the tech industry as Enphase Energy is up 72%, Maxeon Solar Technologies is up 62%, and First Solar is up 56% YTD.

Source: YCHARTS

Similarly, we can see in the below chart that Invesco Solar ETF (TAN) is up 13% YTD and iShares Global Clean Energy ETF (ICLN) is up 7% YTD, and have outperformed other popular ETFs by a wide margin, particularly the Innovator IBD 50 ETF (FFTY) is down (39%), and Cloud Computing ETF (CLOU) is down (36%) YTD.

Source: YCHARTS

Solar Stocks Have Two Important Catalysts

There are two additional catalysts that may help to support the performance of solar stocks this year. The first is the Inflation Reduction Act which is expected to allocate $369 billion to energy security and climate change. Jon Hale, Global Head of Sustainability Research at Morningstar, said that the clean energy sector ETFs had a net outflow of $223 million two weeks before the July 27th announcement and the two-week subsequent, it had net inflows of $434 million.

The second catalyst is the energy crisis in Europe. The price of natural gas is rising, which will become a tailwind for alternative forms of energy. In some cases, the cost for base load energy prices in France, Spain, Italy and Germany are quadrupling or worse year-over-year with one expert saying it’s “like paying $500 for a barrel of oil.” We look at this in detail below.

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The Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 aims to reduce the budget deficit, invest in domestic energy production and manufacturing, lower healthcare costs, and reduce carbon emissions. Our primary aim is to keep an eye on the clean energy industry as IRA unfolds.

According to the estimates, the Act is expected to raise $737 billion from increased corporate taxes, prescription drug reform and through IRS tax enforcement. This will be primarily allocated to energy security and climate change ($369 billion), affordable care act ($64 billion) for a total deficit reduction of $300 billion. The bill which was passed in both the Senate and the House of Representatives, was finally signed by President Joe Biden on August 16th.

The revenue will be raised primarily from $265 billion by allowing Medicare and others to negotiate drug prices with drug companies, $222 billion from the new 15% corporate minimum tax for companies that earn more than $1 billion a year in profits, $124 billion from the stricter IRS tax enforcement, and $74 billion from the 1% stock buyback fee.

The highlight of the bill is investments of $369 billion in energy security and climate change with the goal of reducing carbon emissions by 40% by 2030. It also aims to expand tax credits for the purchase of Electric Vehicles. According to Morningstar analyst Brett Castelli, investors need to focus on three key takeaways:

“First, the act contains a 10-year extension of solar and wind tax credits. These credits had been scheduled to phase out over the next few years and the 10-year provision provides a significant amount of time for clean energy firms to build and benefit from new capacity.10-year extension of solar and wind tax credits. These credits had been scheduled to phase out over the next few years and the 10-year provision provides a significant amount of time for clean energy firms to build and benefit from new capacity.

Second, incentives have been included to support new technology that had not previously been eligible for tax credits. The two areas that we think will see the biggest benefits are hydrogen and energy storage.hydrogen and energy storage.

Third, the act provides incentives for the domestic manufacturing of solar panels and equipment which had largely been imported previously. The provisions in this law significantly increase the incentive to manufacture solar panels and inverters domestically.”domestic manufacturing of solar panels and equipment which had largely been imported previously. The provisions in this law significantly increase the incentive to manufacture solar panels and inverters domestically.”

As stated, electric vehicles are a beneficiary. The previous federal tax credits which were available to Electric Car buyers is going to change with The Inflation Reduction Act of 2022. Companies like Tesla, and General Motors which lost the $7,500 consumer income tax credit when they sold more than 200,000 electric cars, will once again be eligible since the cap of 200,000 EV sales is now removed.

Notably, there is a maximum retail price cap of $55,000 for cars and $80,000 for vans & trucks. There are also other income conditions for the buyers and critical mineral & battery component requirements. President Joe Biden said, “It also gives consumers a tax credit to buy any electric vehicle or fuel cell vehicle, new or used and a tax credit for up to $7,500, if those vehicles were made in America.”

The solar industry will benefit since Inflation Reduction Act includes the extension of Production Tax Credits (PTCs) and Investment Tax Credits (ITCs) for the construction of wind and solar projects beginning before January 1, 2025. It means a three-year extension for PTCs and a one-year extension for ITCs.

It also extends the 30% federal tax credits for installing solar panels on rooftops by another 10 years, from 2022 to 2032. Solar installations are eligible for 26% tax credit for installations in 2020 and 2021. It now extends till 2032 for 30% tax credits, and in 2033 the tax credit will be reduced to 26% and 22% in 2034. There will be no tax credit after this period unless Congress renews it. Home battery systems that store energy generated by solar systems for later use will also be eligible for a 30% tax credit.

The Inflation Reduction Act also has created a new Production Tax Credit for the domestic production and sale of solar and wind components. The tax credit is expected to phase out at a rate of 25% for components sold after 31 December 2029, and no credits will be available after the end of 2032.

European Energy Crisis

The below chart looks at the futures market for the cost for base load energy prices in France one year out. Base load refers to the minimum energy needs to support a grid, and does not include peak energy.

Source: I/O FUND

On August 26th, 2022 the price was $1130/MWh. Twenty Four days earlier the cost was €507/MWh. And one year ago, the same forward price was €78/MWh. Keep in mind, this is the expected cost to power the base load of the French energy grid one year out from now.

This is not just a French problem. The same contract looking at the 1-year percentage increase in the expected cost to power a country’s base load is as follows: Italy +660%, Spain +400%, German/Austria +1200%. Alex Munton, an expert on global gas markets at Rapidan Energy Group, said, “European natural gas is so expensive it’s like paying $500 for a barrel of oil.”

To make matters worse, the French government just bailed out Electricité de France S.A. (EDF), which is the largest supplier nuclear energy to Europe, as well as large supplier of natural gas in France, Belgium, Italy and the UK through its subsidiaries. The €10 billion bailout has made the company 100% nationalized, as the French government scrambles to address the EU energy crisis.

EDF is one of a string of EU energy companies applying for emergency loans as the soaring price of natural gas affects EU supply. Uniper SE, one of Germany’s largest utility companies, was just given a new bailout that allows the German government to take a 30% stake in the company. The on-going losses are unsustainable as rapidly rising energy costs drain needed liquidity to fund daily operations.

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Uniper was Europe’s largest supplier of Russian gas. They claimed the volume it has received from Russian gas this year has fallen by 80% since June, which forced them to find alternative sources of energy at elevated prices in order to meet demand.

France’s solution to the crisis was to instill price caps on energy prices to its citizens. A politically popular policy with the consequence we are seeing with EDF. The energy suppliers are being forced to buy high and sell low due to these price caps. As a result, France has had to hand over roughly €40 Billion in 2022 to keep EDF afloat this year. Ever since, energy prices have doubled as future prices are expected to increase by about 5 times into 2023. If France maintains price caps, they will be looking at an additional €200 billion to keep EDF afloat through the winter with the current price caps.

Regardless, with energy prices increasing with no end in sight, EU officials are calling for major price caps across the board. The EU is forced to choose between on-going bailouts/nationalization of energy suppliers or face the realization that many citizens will be unable to afford energy needs for basic cooking and heating as we enter the Fall/Winter months.

How can a European utility, which has been historically safe, run into insolvency when energy demand has far exceeded supply? It goes back to standoff between Russia and the EU. Russia supplied 40% of Europe’s natural gas in 2020. In 2022, the EU has taken a stance against Russian imports due to the invasion of Ukraine.

As of July 2022, EU has seen a 60% drop in Russia natural gas deliveries, as we move into Fall/Winter. Furthermore, the Nord Stream 1 pipeline, which accounts for 1/3 of all EU’s natural gas imports from Russia, has seen around 1/5 of normal inflows this year. As a result, basic energy price throughout the EU are approaching prices that most citizens simply cannot pay.

Much like the US saw a contagion in banking in 2008, which forced a quasi-nationalization of the industry, it appears that the EU is heading in the same direction with its energy companies. With the multi-year move to shift towards a green energy grid, coupled with the sudden loss of Russian energy supply, the EU appears to have no viable option to avoid blackouts into the coming fall/winter months.

Conclusion:

The NDX is down (26%) YTD and this is one of four years in the last two decades the broader tech index has seen double digit losses. However, there are pockets of growth even in this market and solar is the leader in this regard.

On top of this sector’s excellent performance over the past few months, we foresee its leadership position continuing due to these two catalysts which will create a new trajectory in global demand for renewable sources of energy. We publish premium deep dive reports on individual stocks for our premium members with a focus on Solar this upcoming week.

Knox Ridley, Portfolio Manager at I/O Fund, and Royston Roche, Equity Analyst at I/O Fund contributed to this article.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

2021 Renewables Analysis: Overview of Stocks We Are Targeting

Posted on July 3, 2021June 30, 2026 by io-fund

Over the past fifteen years, there has been a marked shift in the world’s most valuable industry. Oil dominated the top 10 in the prior decade and technology dominates in the current decade. However, what will happen when these two dominant industries merge into renewables and combine the addressable market of fossil fuels with the disruptive nature of technology?

It’s a big question to ask as many renewables companies look like moonshots, or they’ve operated for some time and have cyclical financials. There are many highs and lows in their financials due to the level of infrastructure required for renewables and the dependency on cyclical supply chains. To put it plainly, the financials in the renewables sector are what most growth investors try to avoid. First Solar is a great example as the company rotates between 100% growth in some quarters and negative growth in others. Cyclical issues are the norm and not the exception. We discuss this more towards the end of the report as we identify a handful of companies we are keeping a close eye on.

You can reference our previous renewables report here.

The Bull Thesis:

Our first report on renewables highlighted a study from the College of UC Berkeley claiming that by 2035 the U.S. could see up to 90% of U.S. energy consumption come from renewable energy sources. This report assumes favorable subsidies and legislation that should facilitate this transition and acknowledges that government assistance is not a guarantee. Without government support, the report claims the U.S. could see up to 55% of its energy consumption come from renewable sources by 2035.

Since year-end 2020, we’ve seen even higher growth reported than previously estimated with worldwide capacity growing by 45%. This is the largest annual growth rate since 1999. The growth was driven by a 90% rise in wind power and a 23% expansion in new solar power installations. Most importantly, the IEA is predicting that large capacity gains in renewable energy becomes the “new normal” in 2021 and 2022 with gains in capacity similar to 2020.

The key point to renewables is that the levelized cost of energy (LCOE) for utility-scale solar photovoltaic (PV) has plummeted 400% in the past five years. I covered this for MarketWatch with the image below to depict how competitive solar has become compared to other energy sources. This is important because the industry has seen a change in the story and (generally speaking) is why the renewables’ financials were deep in the red over the last couple of years.

This has led to hockey stick growth. According to the report, wind is growing the fastest (50%) within the renewables category yet solar (26%) is expected to overtake wind power.

The reason for this growth is that the technology is being developed for and marketed to individual consumers whereas wind is designed primarily for a region’s electricity grid. As the efficiency and storage continue to increase, and the cost continues to go down, more people will likely migrate to having a home that is independent of the grid predominantly due to a reduction in personal expenditures, which will also align with the desire to become greener.

More importantly, the cost to produce 1 kilowatt of solar electricity is now competitive with wind, and is the cheapest form of electricity available when taking into account utility-scale systems installed in locations that receive full sun.

If we use the metric of levelized cost of energy (LCOE), solar is more expensive to build upfront, but much cheaper to maintain, compared to a natural gas power plant that is less costly to build but has significant and on-going costs to maintain. As stated, the LCOE for solar has plummeted as much as 400% in the past five years, making the economic incentive a real driver for municipalities and business to develop on a large scale.

Global Addressable Market

Renewable energy companies have global addressable markets, which makes it an attractive industry for investment. In any given region – China, the United States or Europe, energy accounts for 15-18% of the country’s GDP. According to Brookfield Renewable Partners, one of the world’s largest investors in renewable energy, $5 to $10 trillion will be invested in renewable energy worldwide by 2030.

We’ve covered why we are keen on China for electric vehicles specifically. In a similar vein to the country having a need for electric vehicles due to a lack of oil, China is also the biggest manufacturer of solar photovoltaics and the largest producer of solar-generated electricity. According to Wood Mackenzie, China will exceed the United States on solar power through 2024.

Last year, China accounted for 50% of the world’s growth in renewable energy capacity. In Q4 of 2020, China added 3X gigawatts in capacity compared to Q4 2019.

The country’s global share is at 22.9% with a 10-year annual growth rate of 33.4%. Compare that to the United States with a similar global share of 20.1% yet with a 10-year annual growth rate of 10.1%.

India is forecast to become a growth market, as well, with ambitions to reach 225 gigawatts of power by 2022 compared to 10 gigawatts of power in 2019.

India and the United Kingdom are tied for the second highest 10-year annual growth rate in the 17% range after China’s 33%.

With that said, the United States is a key market with 5% of the world’s population yet accounts for 17% of the world’s energy. The daily per capita energy consumption in the United States is 2.6 gallons of oil, 9.7 pounds of coal, and 255 cubic feet of natural gas. Residential consumption is 11.8 kilowatts (KWh) per person.

Even though the growth rate is much lower in the United States, on a per capita basis, the country is in a wide lead for both fossil fuels and renewables. In Q4 of 2020, the United States added 19 gigawatts compared to 13.7 in the year-ago quarter compared to the 3X growth China reported.

Constraints to Renewables:

Renewable energy’s capacity factor is more fixed due to the elements. Solar has a capacity factor of 25%, while wind has a capacity factor of 35%. These numbers are based on the rotation of the sun and other weather patterns. Advancements within this field must come from an acceleration of efficiency during the restricted time that it can produce energy.

The average size of natural gas power plants in the U.S. is 820 megawatts. The average current capacity factor for natural gas in the U.S. is 58%. This means that the average natural gas power plant produces 4,166,256 MWh/year.

Compare this with one of the more advanced on-shore wind turbines, which is about 810 ft high with a blade diameter with a 518 ft diameter. One turbine has a 5 MW size, with a capacity factor of 35%. Therefore, one turbine equals 15,330 MWh/year. In order to have the equivalent energy output of the average natural gas power plant, you would need 272 of these turbines.

There are now off shore wind farms where the capacity factor is an impressive 63%. Furthermore, General Electric has developed an off shore turbine called the Haliade-X that can produce 12 MW. So, one of these turbines produces 66,225 MWh/year. Even with such improvements, you would still need 63 of these turbines, which seems more plausible.

The scalability issue becomes even more exacerbated with solar. For example, the United States is in the process of beginning to build one of the more advanced solar farms in the world, called the Gemini Solar Project in Nevada. When completed, the generation facility will have a size of 690 MWs, and the total land mass it will take to build this array is roughly 7100 acres. For perspective, Central Park in NYC is about 840 acres. So, the size of the Gemini Solar Project is the size of about 8.5 Central Parks.

With a capacity factor of 25%, the total MWh/year comes out to 1,511,100 MWh/year. Thus, you would need nearly three Gemini Solar Projects to equal the average energy output of the average natural gas power plant.

We have seen huge improvements in renewable energy tech; however, total scalability of the U.S. energy grid is not feasible (yet).

Impact from Covid

Due to COVID-19, the energy sector as a whole saw the largest drop in investments in history. The sector as a whole experienced a roughly 20% decline in investments, which includes renewable energy projects. Many believe this is a temporary setback, and preliminary earnings reports seem to agree in some cases while other companies are still reporting negative revenue growth.

Stocks We are Watching

Renewable energy companies that generate free cash flow and have strong balance sheets have a competitive advantage over financially weaker rivals, since they have greater access to the capital needed to finance growth. That's why investors should focus their attention on financially strong clean energy companies.

Although this is not an extensive list, we spell out our thoughts on why a couple of names make our watchlist and why others don’t. We are providing this in case it’s helpful as renewables often have quarters with negative revenue growth, etcetera, so more depth into why we ignore this in some cases and not others may be helpful.

Plug Power:

Plug Power is a high growth company within renewables, and thus has attracted a very high valuation. As we covered before, management is expecting high growth over the next several years, believing that in 2024 it will earn $200 million in operating profit and record gross billings of $1.2 billion (gross billings will be $325M-$330M in FY’20).

Per our previous coverage, HC Wainwright projected Plug's revenues in 2024 will be about $1.1 billion — more than four times the company's trailing revenues currently. Current consensus is projecting Plug to grow revenue 40% next year in FY 2021.

In Plug’s most recent earnings report, the company “reaffirm(ed) the recently raised gross billings targets for 2021 and 2024.” Plug Power’s accounting issues have also been cleared up with minimal impact on the overall financial outlook of the company. The company reported 76% growth in revenue year-over-year for $72 million in revenue which was less than analyst expectations at $77 million. There was also a EPS miss at ($0.12) compared to ($0.08) expected.

Why has the stock done well despite a weaker-than-expected earnings report? My guess is because Plug Power is the fastest growing company within the renewables sector and the underlying key metrics are stronger than the surface-level ER reveals. Although profitability is an issue, Plug Power’s fuel cell systems segment is growing rapidly and this is the company’s most profitable segment.

Gross billings are also very healthy. Here is what the CEO said in the last earnings call:

“Investors should expect $115 million to $120 million of gross billings for the quarter. This is approximately 40% of our target revenue of $475 million for the year. Usually, at this point in the second quarter, […] 33% of our annual revenue will have been achieved. We are at a run rate that is higher from both a revenue and growth rate level than we have experienced in the past.”

Plug Power is at the top of our list right now for renewables.

Enphase:

Enphase has done well because it’s a safer choice than many other renewables as the company has been consistently profitable for many quarters (9 out of the last 10). The company has an adjusted gross margin of 41% with adjusted EPS in the most recent quarter of $0.56.

Not only is Enphase consistently profitable yet the company has maintained industry-leading growth. The most recent quarter reported 46% growth year-over-year and 14% sequentially. In 2019, Enphase was in the 75%-100% growth range. This is important because the company is very consistent where other solar stocks are not.

During Covid, there was a brief pause in revenue growth in Q3 and Q2 of 2020. The company reported flat growth in Q3 2020 and -6% growth in Q2 2020. For this industry, that is not bad at all and is actually a sign of strength that Enphase bounced back faster than it’s peers.

The company has a cash balance of $1.48 billion. In March, the company issued convertible notes due 2024 and 2025 for net proceeds of $1.19 billion.

For the second quarter, Enphase management guided for $300 million to $320 million, or 140% growth. Again, this is due to the weaker quarters the company had last year during Covid, which were flat to negative. It’s better to look at the growth on an annual basis, which is expected to be 70% growth for FY 2021 with analysts expecting $1.32 billion this year, up from $774.4 million.

Enphase is at the top of our list for renewables.

SolarEdge:

SolarEdge competes with Enphase yet does not have the same consistency as the company has reported flat to negative growth for four quarters. The company reported revenue of $405.5 million, or (6%) year-over-year yet up 13% sequentially.

Adjusted gross margins are at 36.5%. The company has $515 million in cash.

Looking forward, SolarEdge is expecting $445 million to $465 million in revenue, or an increase of 37% for the upcoming quarter. The annual growth for FY2021 is expected to be around 29% with the year after at 25.3%.

We will keep an eye on SolarEdge for improving financials.

Blink and ChargePoint:

ChargePoint operates the largest online network of independently owned EV charging stations operating in 14 countries. The adjusted gross margins are in the 20-25% range.

We like this company for its strong cash position and steady forward growth. Revenue increased 24% year-over-year to $40.5 million with management guiding for $46 to $51 million in revenue next quarter. The company also confirmed its revenue outlook of $195 to $205 million for FY 2022 ending in January. This represents 37% growth year-over-year. The company has cash and cash equivalents of $610 million after exercising warrants worth $73.8 million.

Blink is a fast-growing company with revenue growing 72% year-over-year and charging stations growing 370% year-over-year. However, the company has very little revenue to speak of with $2.2 million in the first quarter. It’s easier to put up triple digit numbers with a low revenue base. The company also losses of $7.4 million that have gotten steeper as the company grows, up from losses of $3 million in the previous year.

We wanted to highlight these two to show why we prefer Stem as our high beta play. Not only is Stem growing faster but plans to be profitable this year. Notably, we also have exposure to EVs through Xpeng and Nio. We’ve owned Tesla and Lucid Motors in the past.

Stem:

Stem has over 900 systems operating on its Athena AI software in over 200 cities worldwide. Athena AI optimizes time-of-use and demand charges, resulting in 10% – 30% monthly electricity bill reductions.

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. Notably, the company has a pipeline of $1.43 billion.

The company reaffirmed its 2021 financial guidance for $147 million in the latest earnings report on May 17th. The company also outlined they expect nearly half of the annual revenue to come in Q4.

Revenue came in at $15.4 million in revenue compared to $4 million in the year, up nearly 275%. Adjusted gross margins were at 19% compared to 1% a year ago.

The company expects to reach adjusted EBITDA profitability in 2022 and turn FCF positive in 2023. Gross margins 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%)

Stem is a newer company that must prove itself. On that note, we are very bullish on this company for the exposure to software within the renewables sector that this particular investment provides. Notably, Stem is the one renewables stock and the only SPAC we remained with during the sell-off. Please reference our Stem position on the portfolio and our past research here.

iSun:

iSun offers solar, energy and data solutions. The company is a “deSPAC” or basically SPAC post-merger that has very low gross margins. In the most recent quarter, the company reported $7.26 million in revenue yet had only $119,000 in gross profit. This nearly $0 in gross profit is a pattern in previous quarters, as well. We see this company as too high risk for an entry at this time. The margins would need to improve substantially for consideration.

Bloom Energy:

Bloom Energy has revenue of $194 million per quarter, an increase of 23.8% year-over-year. The adjusted gross margins are at 29% with adjusted EPS of ($0.07). The company has negative operating margins of (7.4%) in the first quarter of 2021 which is an improvement from the (29.6%) operating margin in the first quarter of 2020.

The company has cash of $365.7 million and debt of $522.2 million.

Management guided for forward revenue of $950 million to $1 billion for FY 2021, or 25.7% growth. The company was flat last year and saw very low growth the year prior.

Overall, this company is not high growth enough for our portfolio.

Conclusion:

One reason why the renewables sector is at a starting point (and we are not seeing the full picture yet in terms of financials) is that Moore’s Law applies to renewable tech. For example, the cost per watt in solar has gone from $22 in the 1980s, to $3 in 2011, and is now about $2.90 per watt. In fact, MIT released a report explaining how close we are to $0.20 per watt, which will make the economic benefit of transitioning to solar a real driver for both individuals, businesses and municipalities.

Right now, we rate Plug Power slightly higher than Enphase in terms of positions we want to build. We are also reiterating our conviction on Stem compared to other high beta plays in this sector. We believe these are the top three choices – Plug Power for growth, Enphase as a market leader and Stem for its position with the Athena AI software and strong revenue growth out the gate.

Stem Energy (STPK) Update

Posted on April 14, 2021June 30, 2026 by io-fund

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.

Stem Energy (STPK)

Posted on February 10, 2021June 30, 2026 by io-fund

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.