Star Peak Energy’s SPAC Merger With Battery Company Stem Is Undervalued

Star Peak Energy Transition Corp (NYSE:STPK) is a SPAC (special purpose acquisition company) that will merge with battery-storage management company Stem, Inc. Once that happens, and the symbol changes to STEM, expect to see STPK stock (which will become STEM stock) move up at least 46% from here.

SPACs join company on puzzle pieces and handshake, 3d render
Source: NESPIX / Shutterstock.com

On Dec. 4, 2020, Stem, an AI-driven clean-energy storage systems manager, agreed to a reverse merger with Star Peak Energy Transition. Stem calls itself a “pure-play clean smart energy storage company.”

Essentially, they provide corporations with battery backup by charging during low electricity usage and dispensing electricity during peak hours. For example, they helped California corporations get through the rolling blackouts several years ago.

Moreover, the company already produces revenue and is on track to be EBITDA (earnings before interest, taxes, depreciation, and amortization) and free-cash-flow positive in several years. I believe the combined company stock is worth at least 46% more, or $61.89 per share.

What Star Peak SPAC/Stem Is Worth

Stem is essentially a battery-charging company that can be compared with stocks like Blink (NASDAQ:BLNK), or ChargePoint (NYSE:SBE).

In my last article, I ruled out using Blink as a comp for STPK stock. Essentially ChargePoint stock, very close to the closing of its SPAC merger, trades at a pro forma market value of $11.058 billion. This is because it has 304.9 million shares outstanding on a pro forma basis (page 33 of its SPAC slide presentation).

After deducting $648 million in net cash on the pro forma balance sheet, the ChargePoint enterprise value is $10.41 billion. ChargePoint estimates on page 198 of its presentation that 2021 revenue will be $198 million. Therefore, the enterprise value-to-sales is 52.6 times (i.e., $10.41 billion divided by $198 million).

We can use this ratio and apply it to STPK stock. Star Peak estimates that the Stem 2021 revenue will be $147 million (page 29 of its slide presentation). So if we multiply 52.6 times $147 million, the pro forma enterprise value for STPK stock is $7.732 billion.

To derive the target price, first, we add back the $648 million in cash. That gives us a pro forma market value of $8.38 billion. Next, we divide this by the 135.4 million shares outstanding (see page 33 of the presentation). That produces a target price per share of $61.89 per share.

In other words, by using the ChargePoint/Switchback Energy SPAC pro forma valuation, the valuation for Stem (STPK stock) is worth $61.89. This represents a potential gain of 46% over the Feb. 22 price of the stock at $42.26.

What to Do With STPK Stock

Don’t expect STPK stock to immediately jump another 46% to its target value. After all, the stock is already up 127% in the year-to-date. Maybe it is up too far, too fast for some.

It may take the closing of the merger for people to realize just how much more STPK stock is worth.

One of the problems with most SPACs is that analysts do not tend to write about them before the underlying private company in the reverse merger has gone public. Then they focus on the prospects of the company going forward.

However, often by then, the SPAC stock has already captured most of the wedge value available for astute investors. This is why it is important to properly value the SPAC stock prior to the closing of its merger. That is why I analyzed STPK stock to see what its easily determined value was.

Based on the underlying value of the battery storage company, STPK stock looks to be a good investment at its recent price. Its value is $61.89 per share or 46% more than Feb. 22. Even if it takes two years for that to occur, the compound return annually is 20.8% each year. That is a very satisfactory ROI each year for most investors.

On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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