Batteries are increasing in size as renewables account for an increasing share of the world’s power generation. And that’s great news for energy storage providers.
Renewable energy, which accounted for just 10% of US power production 20 years ago, generates 20% today, and that share should continue to rise as the US, like others, countries, phase out fossil fuels in favor of more environmentally friendly alternatives.
The Biden administration wants to achieve 100% carbon-free generation by 2035. However, for that to work, utilities would need many high-capacity batteries to store the energy produced by wind turbines and solar panels when they blow. gales and the sun is shining, so there is electricity to distribute when they are not.
That’s where Stem (ticker: STEM) comes in. The San Francisco-based company installs large battery packs for utilities and industrial companies and sells software to manage them.
The company is small; Its market value is roughly $ 2.8 billion after falling 20%, to the recent $ 21.34, since its merger with Star Peak Energy Transition in April. But Stem already has dozens of utility customers and has implemented more than 900 systems that combined could produce one gigawatt hour of electricity – enough to power 100 homes for a year. A commitment to Stem is a commitment to the future of renewable energy.
|Recent Price:||$ 21.34|
|Change to date:||4.3%|
|Market value (billions):||$ 2.8|
|Sales 2022E (millions)||$ 315|
|Net income 2022E (thousand)||– $ 16|
|2022E EPS||– $ 0.10|
|2022E EV / Sales||7.7|
E = estimate; EV = business value
Stem doesn’t make batteries, for good reason. Lithium-ion batteries used for commercial storage applications have become commodities, in a market dominated by a few major players, such as
(051910. Korea) and
Contemporary Amperex technology
Battery arrays can replace expensive natural gas-fired power plants that many utilities use to meet spikes in demand, says Credit Suisse analyst Maheep Mandloi, who notes that the transition has been underway for a couple of years. of years. In 2020, for example, Australia bought a huge battery of
(TSLA) to store electricity from a large wind farm in an energy-scarce part of the country.
Energy prices vary throughout the day. Industrial companies typically pay a fee based on the maximum price they fetch each month. Falling battery costs have led many to install solar energy systems with energy storage capacity. These can replace some of the electricity generated by utilities, especially during peak usage periods.
Using renewable energy and batteries to replace power from a utility company is known as “going behind the meter.” Stem installs the batteries and provides software that uses artificial intelligence and machine learning to optimize their performance, automatically switching between battery power, on-site generation, and grid power. “Industrial companies can save up to 30%,” says Stem CEO John Carrington.
Stem’s shares could benefit if tax credits for the battery storage facility were available in a Biden green power plan, encouraging people to buy solar power systems in the same way that credits encourage car purchases. electrical. The stationary power industry will seek federal fiscal support in the coming months.
But even without tax breaks, Stem’s stock looks attractive. Mandloi has an Outperform rating on them, largely because of Stem’s 30% market share in the market behind the meter, where it competes with companies like Enel X, part of the Enel Group (ENEL, Italy), and in software. of energy, with AutoGrid.
Stem had sales of $ 19 million in the second quarter and is expected to have $ 147 million for the full year, up from $ 36 million in 2020. Industrial companies make up the majority of its business, and utility companies and other power generators represent the balance.
Stem, which recently traded at roughly eight times the estimated business value for sales in 2022, looks expensive. But its revenue is expected to more than double in 2022, to $ 315 million. The Russell 1000 Growth Index is trading around four times estimated sales in 2022, but its revenue is projected to grow around 9% from 2021 to 2022. Stem also has $ 475 million in cash, received when it went public in April through from a merger with Star Peak. , a special public procurement company.
Mandloi assumes that shipments of Stem batteries will grow 48% annually, on average. By 2030, he says, it should generate $ 757 million annually in earnings before interest, taxes, depreciation and amortization, or Ebitda. That gives you a target price of $ 48 per share, more than double Friday’s close, or 28 times Ebitda estimates for 2023. On the same basis,
(ENPH), another renewable technology company, trades at 35 times the 2023 estimates.
The potential rewards don’t come without risks, and Stem has many. For one thing, it won’t be profitable until 2022, at the earliest. And if EV sales rise, that could limit the supply of batteries for stationary power applications. And the competition is almost certain to increase.
Many of those concerns may already be reflected in the stock slump since the merger. However, the $ 475 million it has should help the company sustain itself until it begins to generate positive cash flow from operations.
“You need a good balance,” says CEO Carrington. “Counterparts look at you and say, ‘Are you going to be here in 20 years?’ “Since Stem acquired the extra cash, he says, business inquiries have improved. Don’t be surprised if stocks do as well.
Write to Al Root at [email protected]