Star Peak Energy Transition Corp, ticker STPK, is a SPAC stock that recently announced their
merger with Stem, a smart energy storage business.
Not long after this announcement, Citron research released a report that gave the stock a $100
price target.
With this news and the excitement in the clean energy space, it’s no surprise that STPK
had momentous price growth in January.
But despite its recent run up in price, I think STPK is still one of the best stock
picks for the future of clean energy.
So in today’s video, we’re taking a look at STPK, or more specifically, its newly merged
business, Stem.
By the way, this stock will soon be trading under the ticker STEM, so keep that in mind
if you’re looking for it on the markets.
But first, I’ll give you the basics on what Stem does and why you should care about this
stock.
This is going to include an inevitable comparison to Tesla, because there’s definitely some
overlap that we need to address.
Then, we’ll get a little deeper and talk about why this company has such insane growth
potential within the energy space.
Most of the “analysis” I’ve seen on this stock has just consisted of regurgitating
information from Stem’s investor presentation and Citron Research’s report, so I’m going
to do my best to talk about some less-talked-about aspects of the company that I think speak
to why Stem will be so successful.
Last, we’ll be discussing how to value this stock.
Even after increasing 300% in a month, I think there are arguments to be made for buying
this stock at almost any price.
But there are always risks involved with these kinds of investments, so I want to give you
guys some transparency and cover my personal investing strategy for this stock before wrapping
up.
All I ask is that you consider clicking the like button if you get anything helpful from
this video, and stick around to learn about this very exciting energy stock.
I want to make one thing very clear up-front, because it’s something I struggled to understand
when I was first researching Stem’s business.
Stem is a software-focused energy storage business.
Now they do a lot within the realm of energy storage, but I just want to specify that their
software is really the main focus, and their biggest competitive advantage, before we go
any further.
You’ll understand why in just a few minutes.
But back to the basics of Stem: in short, they offer turnkey energy storage solutions
for commercial and industrial applications.
A recent press release describes them as the “market leader in ai-driven clean energy
storage systems.”
So let’s put that in layman’s terms.
Stem provides a network of batteries and related devices to businesses, enterprises, government
infrastructure - basically anyone who would be considered non-residential.
This network allows their clients to store renewable energy and distribute it through
their power grids as needed.
On top of that, they implement their own software that ties the whole network together.
This AI-powered software is called Athena, and it optimizes their energy usage to minimize
costs and maximize efficiency.
So why is Stem important?
Well, it’s no secret that the world is very quickly making the switch to renewable energy,
mostly for environmental reasons.
Solar, wind and other types of renewable energy will eventually power our world, but there’s
one thing stopping them.
This obstacle is the inconsistency in renewable energy sources.
For example, you can only collect solar energy when the sun’s out, and you can only collect
wind energy when the wind is blowing.
This means that in order for us to rely entirely on renewable energy sources, we need to find
a way to harness that energy and store it for later.
And that’s why energy storage and batteries have become such a big focus in the renewable
energy space.
We see businesses like Tesla and Enphase putting a lot of effort into creating these batteries,
so that one day we'll be able to store renewable energy in a way that allows us to leave traditional
energy sources behind.
When we’re able to efficiently store renewable energy, we’ll be able to harness enough
of it that a change in weather won’t impact our ability to power our lives.
But there’s more to it than just creating the batteries, and that’s where Stem comes
in.
Storing the energy is one thing, but connecting these batteries to power grids and using it
efficiently is another challenge entirely.
To illustrate this, we’re going to look at the power grid diagrams in Stem’s investor
presentation.
This is the outdated power grid.
Energy is generated at a power plant, burning fossil fuels and destroying the earth and
stuff.
The energy is then transmitted to substations, where it’s fed through directly to consumers.
But there’s a big problem here, besides the use of fossil fuels.
If any of these mechanisms fail, everything on the other side has no energy supply.
That means power outages are frequent - which they are.
This is the future of the power grid.
In the center, you can see renewable energy sources at work, as well as some traditional
energy generation.
Once the energy is generated, it’s passed down the line to batteries.
By implementing batteries into our power grid, we open up so many possibilities.
Now, instead of energy flowing from the power plant to the consumer, the batteries can store
the energy and redirect it wherever it’s needed.
With this new system, if one of these substations goes down, or if power generation stops momentarily,
the rest of the grid is unaffected.
Instead of a power outage, the system can instantly redirect energy from other batteries
to the areas in need.
And this is the importance of Stem.
While the focus on batteries is undeniably important, Stem is focused on solutions that
can connect all of these batteries into a bigger network to enable the efficient distribution
and use of renewable energy.
And again, the AI-powered Athena software makes sure that this energy distribution and
storage happens as efficiently as possible.
So hopefully it’s not hard to see how important Stem might be to a renewable energy future.
By providing a complete hardware and software solution to customers, Stem is a one-stop-shop
for anyone looking to switch to renewable energy infrastructure.
But now we have to talk about Stem vs. Tesla.
When I was first researching Stem, I thought, “ok, cool, I get it.
Hardware + software is a big advantage.”.
But I couldn’t find ANYTHING about their hardware.
Their entire investor presentation is about their software, and I felt like they might
be trying to cover up some lackluster hardware.
This was going to be a huge red flag for me, because Tesla is making headlines every few
months about their next big breakthrough in battery technology.
I figured with the resources that Tesla has these days, there’s no way somebody like
Stem is going to be able to compete with their battery technology.
Then I realized that Stem doesn’t actually make its own hardware at all.
Instead, Stem gets their hardware from businesses like Tesla, Sungrow, Enphase and so on.
So instead of limiting themselves to their own hardware solutions, they’re handpicking
the best products on the market from the leading battery technology businesses.
And this was really eye-opening for me, because it totally changes the capacity of their business.
First, in regards to Tesla, they won’t be in direct competition.
In fact, they’ll benefit from every battery breakthrough that Tesla makes, because it
means Stem will have access to better hardware at lower prices as the technology advances.
Second, Stem will have no throttle on their business expansion.
For a company like Tesla, their growth is limited by how many cars and batteries they
can create at a time.
We know that they were very effective in overcoming those roadblocks, but to know that Stem won’t
have the issue in the first place is huge.
Stem doesn’t have to worry about enhancing their production capacity and costs, because
these other businesses will do all of that hard work for them.
Stem just gets to sit back and buy the batteries for their clients as they get made.
And that leaves us with the software.
Again, Stem’s AI-powered Athena software is the core of their business, and it plays
a key role in their ability to grow and dominate the space in the future.
Admittedly, Tesla does have a similar software solution for their ecosystem, but they’re
more focused on residential applications.
Additionally, this is a huge potential market with room for way more than one successful
business.
But with that said, let’s take a closer look at why I think Stem can grow and succeed
regardless of Tesla’s role in the industry.
There are three factors that I want to highlight when it comes to Stem’s future potential
as a dominant player in the energy storage space.
These include the size of the energy storage market, the headstart and reputation that
Stem has already built, and their unique business model that will enable rapid growth.
Let’s take a closer look.
Starting with the future demands of the industry, we have to consider the potential size of
the energy storage market.
As the globe transitions to renewable energy, the need for storage and smart storage solutions
will continue to grow.
In 2018, BloombergNEF released a study that predicted 1.2 trillion dollars of investments
into energy storage by 2030.
I was not able to find the original source, but this is a number that both Stem and Citron
Research referenced in their reports.
More recently, BloombergNEF’s new energy outlook for 2020 investigated a pathway to
lowering global emissions.
This time, they estimated it would require between 78 and 130 trillion dollars between
now and 2050 to hit their targets.
That’s an insane amount of money entering the energy storage industry.
As you can imagine, if Stem can capture just a sliver of that investment, they will be
hugely successful.
Next, we have to consider the reputation that Stem has already built, because I think it
shows that they’re in a very good spot to capture some of the investments that will
be flowing into the industry.
Stem has been around since 2009, when they deployed their first VPP, or virtual power
plant, which is the combination of the hardware and software solution.
And it’s important to note that as an AI-powered solution, their Athena software becomes smarter
the longer it runs.
It’s constantly learning and adapting to the energy data it collects from these smart
energy grids.
This could potentially mean that it’s years ahead of any software solution that comes
out today, because it has such a long history of operation and analytics.
And this simply means that the Athena software will be more accurate and more effective than
other solutions.
Additionally, Stem has a 75% market share of the behind-the-meter energy storage market
in California.
Behind the meter refers to basically anything dealing with energy usage after its distributed
from a utility service.
This won’t include utility providers themselves, but instead will include all of the independent
renewable energy systems and the businesses that use them.
So again, Stem controls 75% of this market in the state.
California is the largest energy storage market in the US right now, and the fact that Stem
is the biggest provider in that space speaks volumes.
This shows the magnitude of their involvement in the industry, and other states will definitely
look to California, and thereby Stem, for how to make these changes themselves.
On Stem’s website, they have an impressive number of case studies covering the projects
they’ve completed in California.
From a sports complex, to a water treatment facility, to logistics and manufacturing facilities,
they’ve completed some massive projects with very impressive cost savings to show
for.
They also just recently secured a project for a water treatment plant in Boston, which
is a good indicator that they’re ready to expand well beyond the state of California.
Overall, they have a huge catalog of work and data to show that they can deliver results
for a variety of clients.
The third factor I want to discuss is the one that excites me the most, and that’s
their business model.
As we mentioned earlier, they’re software focused and they use other companies’ hardware
for their turnkey solutions.
As this slide in their presentation shows, they’re not making great margins from hardware
because they’re just reselling it.
On the bright side though, every sale comes with their proprietary Athena software, which
has great margins AND a recurring revenue model.
For each hardware integration, Stem secures a 10 to 20 year contract for the client’s
use of the Athena software, providing long-term recurring revenue.
This could be really powerful as they build a larger client base, because they’re going
to bring in an increasing stream of contracted revenue.
With this structure, I think Stem will be able to move pretty swiftly when acquiring
new customers and increasing their revenue.
The only variable left is how agile the Stem team can be in this process - but they’ve
already prepared for rapid expansion with something called Stem University, and bear
with me for a minute here, because this is my absolute favorite thing about this business.
Stem University is a partner program open to engineers, contractors and anyone else
who is involved in the energy storage space.
Stem provides free, in-depth training to these individuals to teach them how to optimize,
sell and deploy storage solutions for a given client.
And let me tell you why this is going to be so powerful for Stem.
Stem University essentially trains any team on how to sell Stem’s hardware + software
solution.
Not only that, but it gives these individuals access to software that helps them determine
the exact combination of hardware components needed to optimize a customer’s energy needs.
Then, these individuals can carry out that transaction without Stem needing to step in,
but ultimately sending more revenue to Stem.
This is a win-win, because small businesses have access to industry-leading software that
helps them identify the best energy storage solutions for their clients.
This will help them earn and retain more customers.
Stem, on the other hand, gets revenue from every single deal that’s made through one
of their partners.
And again, with recurring revenue from their software, that can add up fast.
With Stem University, there is no limit to how fast this business will be able to scale.
They don’t even need to hire internally, because they incentivize others to become
partners and sell their solutions for them.
What’s more, Stem has partnered with Soligent and Bayware Solar Systems, two of the largest
solar equipment distributors in the country.
These distributors will work directly with Stem partners to address the needs of smaller
businesses, while Stem can remain focused on big enterprise projects that require their
direct involvement.
The presentation I listened to that covered Stem University and the Soligent partnership,
which I’ll link below, even mentioned that Stem will pass leads to Stem University partners,
which again will allow Stem to remain focused on big contracts while still serving every
potential customer in the market.
Overall, I think Stem University, and Stem’s partnership with these distributors, gives
the business infinite potential to scale as rapidly as needed.
So that sums up why I think Stem has the potential to capture a respectable share of the energy
storage space in the coming years.
And that brings us to our last topic, which is valuing this stock and trying to identify
an attractive entry point.
As I mentioned earlier, Citron Research gave this stock a $100 price target, which was
based on its total addressable market and its enterprise value to revenue multiple,
which is significantly lower than similarly positioned businesses.
I also came across a video by a fellow YouTuber, whose name I cannot pronounce but will link
everywhere possible, who did a great job calculating fair value based on projected earnings and
the benchmark metrics in Stem’s investor report.
According to his calculations, which I personally agree with, the fair value of Stem for 2022
is somewhere between 22 and 35 dollars.
So we have some numbers to go off of here, but I’m hesitant to put any sort of price
target on this stock for two reasons.
First is the obvious, and that’s the chance that Stem over-delivers on their earnings
in coming years.
Under the Biden administration, it’s pretty likely that we’ll see huge investments into
clean energy, and I imagine that will benefit Stem quite a bit.
Additionally, based on the advantages Stem has going for it, I think they’re in a great
position to capitalize on the growing demand for smart energy storage.
Both of these things mean that higher than expected earnings are a very real possibility,
which pushes up a potential “fair value” price target.
This seems even more likely with an update that Stem just gave regarding their forecasted
revenues.
They announced that their total revenue for 2020 is actually about 10% higher than previously
expected, and they've already secured 100% of their forecasted 2021 revenue with contracts.
Considering these announcements, we might really see their revenue start to accelerate
in growth in the coming years.
The second and more speculative catalyst I’m expecting is the current trends we’re seeing
in the market.
In today’s market, companies are given obscene valuations based on nothing more than an idea,
which we’ve mostly seen in the electric vehicle space.
Citron Research touches on this in their report, and compares Stem, at a low $3 billion valuation,
to QuantumScape, a business with a $25 billion valuation that has no real products or revenues
to show for.
What I’m getting at here is that we’ve seen the hype around SPACs and clean energy
businesses push these stocks way beyond practical valuations.
We’re also seeing massive inflows into ESG stocks and funds, which Stem could very well
be a part of.
Considering Stem checks so many of these boxes, I think it’s realistic that it may also
be pushed to extreme valuations, which could make anything in the ballpark of $35 seem
like a reasonable entry point.
The more I hear and read about clean energy initiatives, the more I become confident that
it’s going to be an inevitable and highly profitable future.
With many billions and even potential trillions being invested into energy storage and modernizing
the grid, I feel pretty confident that Stem will see higher valuations in the future.
Again, I don’t feel comfortable putting a target on that price because there are so
many different variables to consider in this unusual environment.
So personally, I’ve picked up a few long-term call options on the stock and I’ll continue
picking up shares as the price fluctuates, particularly under the $30 mark.
Just to clarify, this stock and my strategy is a risky play.
As excellent as my videos are, they should not be used to make any investment decisions,
so please evaluate your decisions carefully and don’t sue me.
But drop me a comment below if you have any thoughts on Stem and STPK.
I’m almost feeling a little too bullish here, so if you see any red flags, I would
love to hear them.
Otherwise, just hit that like button if you enjoyed this look at Stem and I’ll see you
in the next video.