A wind turbine spins at a wind farm
Sean Gallup/Getty ImagesAnother special-purpose acquisition company is merging with another new energy company, but Stem, the business being acquired this time, is a little different than the other electric-vehicle makers, EV parts suppliers, and solar-power companies popping up on investors’ screens.
Stem is merging with Star Peak Energy Transition (ticker: STPK). The deal was announced in December and is moving toward completion. The companies hosted an event Monday to teach analysts and investors a little more about Stem’s place in the renewable-energy world.
Stem is an energy-storage company. Think batteries, but not for EVs.
Stem’s storage is for utilities. The company also sells battery optimization software called Athena. Williams Trading analyst Sean Milligan explained it to clients like this: He called Stem a “pure play virtual power plant provider with SaaS leverage.”
That’s a mouthful, but it is instructive. The electricity stored in Stem batteries can, essentially, be used to generate electricity on demand—like any other power plant. Many solar installations, for instance, now come with battery storage so they can provide power when the sun isn’t shining.
SaaS is industry jargon for software as a service—products such as Microsoft (MSFT) Office 365. Users pay a monthly fee. Much of the technology resides in the cloud, and the software is continually enhanced and updated without users having to buy any new hardware.
Milligan rates share at Buy and has a target of $67 for the stock price. Star Peak stock—the stock that will change its symbol to STEM when the merger wraps up—closed Tuesday at $29.31.
At about $30, Stem stock is valued at about $4 billion based on the 135.4 million shares that will be outstanding after the deal closes. The company expects to generate more than $500 million in sales and more than $100 million in earnings before interest, taxes, depreciation, and amortization, by 2023. Sales are expected to more than double from there, and Ebitda is expected to grow fourfold, by 2026.
Monday, the company updated investors about its backlog of orders. Back in December, when the deal was struck, Stem listed $145 million as its backlog for 2020. The new figure for 2021 was $200 million as of Jan. 17.
The company expects to increase sales from about $33 million in 2020 to $147 million in 2021. Imperial Capital analyst Jason Wangler called the update incrementally positive in a Monday research report. The new backlog figure more than fully covers the $147 million in estimated 2021 revenue.
Wrangler, however, doesn’t have a rating or price target on Star Peak stock.
Despite the positives, Star Peak shares have fallen for a couple of days, going from more than $34 to just under $30.
Still, the stock is up a lot in recent weeks. Star Peak stock jumped from about $10 to $17, up 69%, the day the deal was announced. They kept moving higher from there, and shares added another 32% after Andrew Left’s Citron Research wrote a positive research report about the company in early January.
“As the world moves away from carbon to wind and solar power, smart storage of clean power is more important than ever,” wrote Citron, a firm known for its negative calls on stocks. “The global energy storage market represents a $1.2 trillion opportunity and is expected to increase 25 [times] by 2030.”
Left believes Stem can capture some of that growth. His fund holds the stock and values it at $100 a share.
A majority of new power installations now come from renewable sources. As the electricity grid evolves, there will be a need for systems to store and manage solar and wind-generated electricity. “The [energy] grid is getting decentralized, digitized, decarbonized and democratized,” CEO John Carrington told Barron’s in a recent interview. “Complexity is everywhere. You need good software.”
He believes Stem has the technology that will be needed.
Star Peak filed updated documents with the Securities and Exchange Commission recently, but a date for the merger vote hasn’t been set. Investors, however, are all but certain to approve the deal. If the transaction was voted down, Star Peak stock would migrate back to $10 a share.
Write to Al Root at allen.root@dowjones.com
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