Will Stem SPAC Investors Beat the Market?

More and more companies are creating renewable energy initiatives to lower their electricity bills, cash in with tax credits, and contribute to their ESG objectives. Stem has emerged as a leader in clean energy storage and distribution, forging deep customer relationships with many Fortune 500 companies. Sometime early in 2021, Stem will go public via a reverse merger with Star Peak Energy Transition Corp (NYSE:STPK) — and the combined company seems likely to beat the market for three crucial reasons.

A field of wind turbines and solar panels.

Image source: Getty Images.

Why do customers choose Stem?

Renewable energy sources such as solar and wind face a vital problem: intermittency. Weather changes, the sun rises and sets, and the power they produce just isn’t available all the time. Stem’s battery storage systems address that problem, storing energy as it’s made and distributing it in those moments of intermittency. Customers such as Apple, Amazon.com, UPS, Alphabet, Facebook, Home Depot, and Walmart have all lowered their electricity costs and benefited from tax credits due to using Stem’s battery storage systems.

Let’s review the three crucial reasons that could lead Stem toward market-beating results.

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1. Patented smart energy software

Athena, Stem’s patented AI and machine learning software, determines intelligently when and where to distribute the energy from the batteries. Athena provides businesses, utility companies, and power generation companies the flexibility to buy energy at the cheapest times, to use more renewable energy, to sell energy at the best price, or to switch to backup power during a grid outage. 

2. Diverse customer expansion

Stem has multiple growing customer bases that benefit from its Athena AI software, including corporate businesses, utility companies, and power generation companies. Stem has partnerships with 40 utility companies, including large-scale power companies Duke Energy and Dominion Energy, to help them reduce the volatility of their energy spikes and support local grid capacity needs. Stem has 900 systems in 200-plus cities, and it’s continuing to expand its different customer bases. 

3. Hypergrowth

Stem has the technology and first-mover advantage in this market, but it also has an experienced leadership team and hypergrowth revenue results. Founder John Carrington serves as CEO alongside a leadership team that combines 150-plus years of experience in the energy and technology markets. Stem doubled its revenue in 2020 to $36 million, and it’s expecting to grow in the next five years at a compounded annual rate of 51% to $944 million. The business is not free cash flow-positive yet, but it expects to reach this milestone by 2023.

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What’s the risk?

Energy stocks can be slow-growing, with low margins, and subject to political policy risk. But, Stem has accelerated revenue growth and expanding gross margins, and a current presidential administration is creating policies to support renewable energy and fight climate change.

Investing in a company in its first year of going public can be risky, since it may operate differently in the public market. Companies that go public via a SPAC are able to go public much faster than traditional IPOs; they’re not dependent on banks and federal regulators, so they face less financial scrutiny. But a SPAC merger can collapse at the last minute if shareholders do not vote to complete the deal at the previously negotiated price at which it was to go public.

Finally, another company might create a better AI battery storage software platform and take customers away from Stem. There will be risks with any company you invest in the stock market. Investors must ask themselves how strong those risks are — and whether their potential gain seems greater. 

What’s the reward?

Stem has projected the reverse merger to be complete by the end of the first quarter of 2021, at an estimated $3 billion to $5 billion market cap, depending on the price at which its 135.7 million shares close. As of March 25, the market cap of the SPAC would be $3.7 billion.

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In addition, Stem is riding massive tailwinds. According to Bloomberg New Energy Finance’s report, the clean energy storage market is projected “to be $1.2 trillion by 2030, which is 25 times the size it was in 2018.”

After the merger is complete, keep an eye on whether Stem can achieve its lofty 2021 revenue goals, and how quickly it approaches positive cash flow, to see just how bright a future Stem might have.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/04/06/will-stem-spac-investors-beat-the-market/

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