Stem (NYSE:STEM) stock has traded sideways, since the SPAC (special purpose acquisition company) merger that took it public closed in late April. Months before the closing, when it was known as Star Peak Energy Transition, shares hit prices topping $50 per share. STEM stock investor enthusiasm was off-the-charts for this renewable energy storage play.
But, now? The stock changes hands for around $30 per share. And, even after a near-50% decline from its highs, it’s still richly priced. Even when taking into account its growth potential.
To some, paying up now may not be much of an issue. That is, it may experience some volatility along the way. Yet, as its projections turn into tangible results, it could become worth many times what it trades for today. Even so, that doesn’t necessarily mean you should jump in right now.
As last month’s fears of rising inflation/interest rates have cooled, we’ve seen a “story stock” rebound. Still, said rebound may not last. Not only because there’s still a risk of rising interest rates. With investors now more skeptical about buying growth stories “at any price,” it may be tough for names like this one to gain further. In fact, we may be in for another near-term pullback. With the potential for a better long-term entry point just around the corner, the best move here may be to take your time.
STEM Stock and its Long-Term Potential
Back in February, I discussed why there’s plenty of substance to back up the hype surrounding Stem. Namely, due to what’s really the play here. At first glance, this appears to be a battery hardware storage company. But, it’s the company’s Athena energy software platform that’s the main area of interest.
This technology is what gives it the opportunity to lead the pivot from electricity generated from fossil fuels, to electricity generated from renewable sources. One of the factors holding back solar and wind is the intermittent way they’re generated. In other words, unlike coal or natural-gas generated power, it can’t be produced 24/7. In turn, this requires the ability to store it for later use once generated.
That’s where the need for software like Athena comes into play. Helping to better optimize stored energy created by renewable sources, technology like this will help make alternatives a sufficient substitute for the environmentally-damaging existing sources. With this big potential, it’s easy to see why investors still remain confident in its long-term prospects.
The “story” behind this “story stock” is helping to sustain the rich valuation of STEM stock today. But, with the risk growth stocks correct yet again, that may not be the case a few months from now. With the risk of growth stocks experiencing yet another sell-off, it may not be best to rush in today.
Story Stocks Like This One Have More Room to Correct
At today’s prices, Stem sports a market capitalization of $3.9 billion. At first glance, this may appear to be a rich valuation. Sales for this year are only expected to come in at $147 million. And, still scaling up, the company projects it’ll operate in the red this year as well. But, take a closer look, and it’s easy to see why investors remain willing to pay up.
Projections call for long-term annualized growth of 50%. Not only that, eventual EBITDA margins of around 35% as well. With this in mind, today’s valuation appears much more reasonable. Even so, that doesn’t mean the stock, while down 50% from its highs, can’t correct further in the months ahead.
Why? The worries about rising inflation/interest rates experienced last month, which put downward pressure on growth stocks, may have cooled off a bit. But, it’s still a concern. And, even if the recent inflation chatter winds up being overblown, valuation concerns could again hammer richly-priced growth stocks.
The result? Even if this company lives up to its projections, it may not result in big moves higher for STEM stock. Instead, as investors reassess valuations, we could see shares make another major move lower.
Bottom Line: A Solid Long-Term Play (at Lower Prices)
President Biden may still be negotiating his infrastructure bill, which could provide a major boost for the growth of clean energy plays like Stem. But, infrastructure bill or not, the trends are still moving in this company’s direction.
With its Athena software platform possibly the “secret sauce” that helps pave the way for more widespread renewable energy usage, this “green wave” play stands to live up to expectations. Yet, that may not be enough to prevent shares from pulling back on valuation worries. Much less, help push shares from today’s levels, back up towards their all-time highs.
So, weighing long-term potential against possible short-term volatility, what’s the best move? Wait for STEM stock to make another big move lower before entering a position.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.