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Stem Inc. (STEM stock) analysis, financials, analyst prediction

Updated: May 1

Stock price: $25.34

Market cap: $3.27B

Enterprise value: $3.39B

Stem, Inc. provides artificial intelligence (AI)-driven clean energy storage services. It delivers and operates smart battery storage solutions that maximize renewable energy generation and help build a resilient grid. The company’s Athena, a AI-powered analytics platform software that uses artificial intelligence and machine learning to automatically switch between battery power, onsite generation, and grid power. Athena stabilizes the grid, reduces carbon emissions, and solves renewable intermittency across the network of distributed energy storage systems. The company serves customers, including Fortune 500 corporate energy users, project developers and installers, and utilities and independent power producers. Stem, Inc. was founded in 2009 and is headquartered in Millbrae, California.

Stem Inc. is currently trading with a market cap of $3.27 and an FY21 revenue outlook of $147 million. This gives the Price-to-Sales of 22. This is very high meaning the company is quite overpriced for its current level of sales. I would usually stay away from so strongly overvalued stocks. However, Stem Inc.'s predicted growth may warrant such high valuations for a long-term investment. So it is worth looking further into the company predictions before discarding it.


Analyst predictions say that the company revenue will double in 2022, and then continue to grow at ~35-40% per year.


Stem Inc. itself predicts revenues to reach $1.167B by the end of 2026. This represents 81% CAGR. However, this CAGR includes explosive growth from 2020 to 2021 and to 2022.

The company expects the growth to slow down to 26% after 2024.


The company provided FY21 guidance of $147M, stating the seasonality of the business is such that most of the revenue will hit in Q3 and Q4. However, the most interesting number in the below slide is the pipeline of $1.43B, which the investors' presentation defines as "Total value of uncontracted, potential hardware and software revenue from opportunities currently in process by Stem direct salesforce and channel partners, which have a reasonable likelihood of contract execution within 12 months"


I am not able to comment on how well Stem's sales agents convert opportunities to business, the below information is also reassuring.


The reassuring point here is that between the end of 2020 and May 2021 the company added 10% in GWh and $37M in the contracted backlog representing 20% growth in 4 months.


The company is also scaling up to support the growth. As of December 2020, the company had 143 employees. There are 23 positions currently open on Stem Inc. website.


To summarize the above information, the company is currently overpriced based on EV/Sales ratio and may see the price of its stock further decrease in the near term. It must be noted that the average EV/Sales for SP500 is currently 5.38. Future revenue CAGR is not a good predictor of EV/Sales ratio (correlation of 24%).


In the long run, the company is likely to reach a point of fair valuation. In 2024, with the predicted revenue of $778 and the current Enterprise Value of $3.39B, EV/Sales ratio would stand at 4.36 which is quite low for a growing company.


Chart-wise, STEM hit $16 a couple of weeks ago. Since then, it released the latest earnings report where it showed Year-on-Year revenue growth of 275% year-on-year to $15.4 million, exceeding the higher end of the company guidance. The price moved up, broke through a down-looking trend line and MA50 line. At the moment it seems it might be building a reverse heads-and-shoulders formation. $22 would be the support, $32 - the resistance the stock price needs to break.

The company was definitely more attractive buy at $16 when its Market Cap briefly stood at $2B; however, I don't think we will see such prices again, but I would be delighted to add at those prices.




STEM valuations based on EBITDA


EV/EBITDA ratio is a better-correlated metric to the next 5 year CAGR (correlation of 38%, meaning companies with higher expected growth also usually have higher EV/EBITDA ratio). The current average EV/EBITDA ratio for SP500 is 17; however, a more conservative look at this ratio states ratio of 10 is considered to be fair.


Below are the predicted revenue, gross profit, EBITDA, and Cash Flow predictions from STEM.

First, the company is expected to start generating profit (positive cash flow) at the beginning of 2023.

Second, the company expects to achieve EBITDA of $417M by 2026. At that point, the company is expected to grow at 24%. Currently, companies growing at 20%+ in revenues in SP500 and Russell 2000 trade at an average EV/EBITDA of ~30. The EV/EBITDA of STEM in 2026 using the current level of EV would be $3.39B / $417M = 8.1. This would mean the company EV might go up 30/8.1 = 270%.

Third, the company is expecting to improve its Gross Margin and EBITDA margins over time which is positive. The higher-margin companies usually get better valuation ratios.


STEM analyst ratings and price targets


There are currently only 2 analysts covering the company and both have a BUY rating for STEM stock. One of them gives a target price of $30; the other - $42.


Summary for STEM stock


While the company is currently overpriced and the price may stay in the $20 to $32 range for the rest of the year I think the long-term potential for the company is enough to hold it for the next 5, 10, maybe even 20 years.


The company already works with several Fortune 500 companies which means sales would become simpler as the company proves it was able to save huge electricity bills for these companies.


Also, while the company predicts its growth will slow down to 24% in 2026, the overall category is expected to accelerate growth in the following years in an exponential chart with a total market opportunity for energy storage expected to reach $1.2 trillion by the end of 2030. Even 1% of this market would give a company annual revenue of $14B.



Disclaimer: As usual, trade at your own risk. I own STEM stock. I do not suggest you should buy any of the stocks I write about. As usual, please do your own due diligence before investing your own money in any of the stocks I write about. The above analysis is quite basic and just gives ideas for further research. A much deeper analysis is required for each stock, including the analysis of operations, debt, etc. I may sell any of the stocks I say I currently own at any moment before it reaches the targets that I set or keep them for even when they reach the target.

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