Blank-check company Star Peak Energy Transition (NYSE:STPK) stock is down roughly 15% this month.
The company had posted some impressive gains after announcing its merger with battery technology specialist Stem. However, STPK stock has lost some ground in the past few months amidst a lack of investor interest in growth-dependent tech securities.
Moreover, with a 57.4% increase in the accumulated deficit for Stem, investors should employ the wait-and-see approach with STPK stock.
You have to admire Stem’s goal here, though. It plans to become the first publicly traded smart energy storage pure-play. The integrated energy storage market is expected to grow to $1.2 trillion within the next 30 years.
Therefore, it has a massive addressable market which could result in a premium value for the stock. The euphoria around the merger led to a 167% growth in SPTK stock in the past six months.
However, a few question marks, especially regarding its path to profitability, limit its attractiveness.
Earnings Results
Stem recently released its financial results for 2020, ahead of its merger with Star Peak Energy Transition. Revenues increased by a whopping 69.6% to $36.3 million. However, the fourfold increase in revenues was unable to lead the company to profitability.
There was a 57.4% increase in its accumulated deficit to roughly $408 million. Operational expenses have shot up roughly 26.8%. The company has admitted that profitability appears to be way off at this time.
The company had guided that it expects revenues to be four times greater in 2021 than in 2020. It re-affirmed its guidance in its earnings report in March. Moreover, analysts forecast that its revenues could increase at an incredible 96% to $944 million by fiscal 2025.
A core element of Stem’s future potential depends on its AI-driven energy solution, named Athena. The platform is effectively used for demand and supply forecasting and battery optimization. With Athena being a recurring SaaS model, it has a strong gross margin profile that will ease its path to profitability.
Despite the rampant growth in revenues, the company has proven to be ineffective in managing its costs. Its net loss continues to grow at a massive rate which will continue to widen its bear case.
Looking Forward for Star Peak Energy Transition
Stem expects to continue incurring losses through 2022. It has a tall order ahead of it is turning a profit which is contingent on several factors. Some of these factors include growth in its sales volume, ability to procure ESS equipment cost-effectiveness, and attracting new customers for its high margin offerings.
Furthermore, a lot of its success will depend upon the adoption of renewable energy and the cost reductions in battery storage. As far as adoption rates are concerned, market analysts are certain of the massive potential of the smart energy storage industry.
However, production can be a major issue, mainly because Stem depends on various suppliers and could be affected by disruptions, outages and other aspects.
Stem has also raised concerns about its internal control mechanism over its financial reporting. It states its limited resources, and the complexity of transactions had created material weaknesses in its internal controls.
This raises doubts about the veracity of its financials ahead of its merger.
Bottom Line on STPK Stock
Star Peak Energy Transition will be merging with Stem and unlock a lot of value for the investors of the combined entity. Though it has momentum behind it, several risks complicate its bull case.
Profitability is perhaps the biggest thorn on its side, and it needs to work on its path to profitability seriously. Moreover, it needs to sort out its internal controls before investors lose their faith in its financials.
Hence, it’s best to wait and see how STPK stock progresses in the coming months before thinking about investing in it at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
