Shares of shell company Star Peak Energy (NYSE:STPK) have been on fire since the start of the year, growing over 127%. STPK stock has been climbing since December, after unveiling its plans to merge with battery technology specialist STEM.
The goal is for the combined company to become the first publicly-traded smart energy storage pure-play. Five-year revenue growth targets for STEM are expected to increase by more than 2000% to $944 million.
STEM provides unique energy storage solutions in stabilizing the electric grid as more renewable energy continues to be implemented.
STPK stock has taken off impressively since it announced the merger and now boasts a market capitalization of over $2.2 billion. It continues to climb sharply, but there is still massive upside remaining to the stock despite its rapid ascent.
As its current market capitalization is only a fraction of the trillion-dollar market opportunity it presents, STEM is a mature player in the industry with zero debt and plenty of cash. Moreover, the tailwinds from the upcoming green initiatives by the Biden administration will continue to unlock more growth opportunities as we advance.
STEM’s Massive Potential
STEM provides smart battery storage solutions for its customer base powered by its robust AI platform called Athena.
The platform is essentially a smart AI and machine learning solution which improves distribution efficiencies and energy storage capabilities. It reduces energy costs, carbon emissions and improves reliability for the electrical grid.
The growth runway appears to be massive for the company at this point. It ended the past year with $33 million in revenues. Over the next five years, revenues will rise by $911 million annually. By 2026, the company projects to break the $1 billion mark in revenues and expects to witness double-digit growth over the next five years.
The U.S. Energy Information Administration (EIA) recently released its annual energy outlook for 2021, providing forecasts up to 2050. It projects that by 2050, renewables energy consumption could account for 42% of total electricity generation.
The big positive for Star Peak with its merger with STEM is its minimal downside risk. It has over $500 million in its cash till and zero debt. With the evolving energy grid, government spending on green energy projects, and other growth tailwinds in the sector, STPK stocks look highly attractive.
Impressive Margins
Perhaps one of the most impressive aspects of STEM’s business is its healthy margins across three operating segments. It currently has three main business segments: hardware and network integration, software, and market participation.
The company’s hardware and network integration segment provides its customers with a unique energy storage solution with at least 10-30% gross margins. Moreover, there is the software segment, which is based around a recurring SaaS model.
It provides recurring revenues to STEM with roughly 80% margins. Also, there are add-on services that customers can potentially add to their packages providing additional revenues.
The company’s third and final segment is called market participation, where it stores excess energy to avoid solar clipping. With the expansion in its customer base, the company improves revenues from its market participation segment. Currently, the segment provides roughly 80% gross margins, which should grow over time.
Bottom Line on STPK Stock
Star Peak Energy has lofty ambitions and ones that could propel it to its industry’s exalted position. Becoming the first smart energy storage pure-play company will provide it assess to a colossal addressable market and the first-movers advantage in its sector.
Its merger target in STEM has an amazing growth runway which has minimal downside risk as an investment. It boasts healthy margins across its business segments, further increasing its attractiveness to STPK stock’s investors.
Therefore, STPK stock is a fabulous investment at this time and one which is trading at a discount in line with its massive potential.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
