In recent weeks, Stem’s (NYSE:STEM) positive micro and macro catalysts have strengthened , making the shares even more attractive since my last column on the name was published on April 30. Yet since the end of April, STEM stock has only climbed about 5%.
As a result of these developments, I strongly recommend that investors buy the shares on their current weakness.
Stem’s Micro Catalysts Have Intensified
On May 17, Stem reported that its first-quarter revenue had soared 275% year-over-year, reaching $15.4 million. Although $15.4 million is, of course, not a great deal of revenue for a company, the huge growth of Stem’s sales is extremely impressive.
What’s more, the company’s hardware sales ballooned “14.7 times” YOY to $10.5 million, while its bookings climbed 150% YOY, enabling its backlog to reach $221 million.
The gigantic increase in the company’s hardware sales suggests that its overall top line is likely to continue to climb going forward. That’s because Stem will be able to carry out services, which account for the majority of its revenue, on the hardware that it has already sold. Meanwhile, the $221 million of backlog is impressive for the company, since the market capitalization of STEM stock is now just $3.3 billion.
Stem’s Macro Catalysts Have Strengthened
After all the Senate Democrats recently made a deal to pass a $3.5 trillion budget that’s slated to include the party’s environmental agenda, the spending plan is likely to provide Stem with a tremendous boost.
That’s because, according to a longtime analyst cited by Utility Dive, that agenda includes “a new tax credit for energy storage; a 10-year extension of current renewables tax credits; and a ‘direct pay’ revision that would allow tax credits to be used like cash by utilities and others without any tax liability, such as public power utilities.”
Since Stem’s software enhances the performance of lithium-ion battery — the main system used for energy storage that enhances the effectiveness of renewable energy — the company is likely to benefit tremendously from the first two provisions cited by Utility Dive.
And direct pay would likely enhance the development of renewable energy projects by providing tax credits to more developers of such projects. So the direct-pay provision would probably also meaningfully lift Stem’s business.
Moreover, as I’ve stated in multiple previous articles, many if not most states and large nations have instituted renewable-energy mandates that will greatly intensify the use of those energy sources in the coming years.
Credit Suisse Was Upbeat on STEM Stock
In a note to investors on June 29, Credit Suisse started coverage of Stem, placing an “outperform” rating and a $48 price target on the shares.
Contending that “Stem benefits from a strong and growing battery storage market, the firm believes that the company can benefit “from a tax credit extension and standalone storage tax credit not reflected in the stock price.”
On June 29, Stem was trading around $36.80. As of late afternoon trading on July 20, it was changing hands for about $26.50.
Credit Suisse thought that the shares were undervalued when it issued its June 29 note, so the firm must think that STEM stock is tremendously undervalued now. Indeed, its $48 price target close to double where the level at which the shares are trading today.
The Bottom Line on Stem
The shares are trading for just over ten times analysts’ average 2022 revenue estimate. That’s not a very high valuation for a company that’s set to benefit from huge macro trends, is growing rapidly, and expects to generate positive EBITDA in 2023.
Also worth noting is that Enphase (NASDAQ:ENPH) and SolarEdge (NASDAQ:SEDG), which provide hardware used in solar energy projects, have market capitalizations of $23.5 billion and $13 billion, respectively. Stem, which currently has a market capitalization of $3.35 billion, is likely to close the gap with those companies in the longer term.
On the date of publication, Larry Ramer held a long position in STEM stock.