Stem (NYSE:STEM) is a new kind of manager with assets under management (AUM). Its assets are electricity storage assets (large batteries), instead of monetary assets, and its service or value-added is AI-based software. But it is just as profitable as other managers — or soon will be — as it gains scale. As a result, expect to see STEM stock move higher as the market revalues it as a growing asset manager.
Here is what I am talking about. In the company’s May 17 Q1 earnings release, it said its energy storage business had “Contracted AUM of 1.1 Gigawatt hours (GWh).” In addition, this was up from 0.48 GWh a year ago.
Moreover, the company provided guidance of $147 million in revenue for 2021. In addition, by Q4 it expects its revenue will be 50%-60% higher than the previous year. It also has a “12-month forward” pipeline of $1.43 billion. This is the amount of uncontracted, potential hardware and software revenue from opportunities currently in process by Stem.
What This Means Going Forward
In my last article on STEM stock, I argued that Stem is likely to follow the progress of its original slide deck projections (from its SPAC deal).
Based on its 2025 forward sales and using a discounted price-to-sales (P/S) metric, the stock should have a market value of up to $5.3 billion. As of the close on July 30, its market value was $3.4 billion. Therefore, its true value is 55.9% higher than its closing price on July 30 of $27.11. This means the target value for STEM stock is $42.26.
Other analysts now tend to agree with my valuation. For example, Yahoo! Finance reports that three analysts have an average price target of $41.33. This is close to my target price of $42.26 for STEM stock. This is similar to the average price target of $39 that TipRanks.com reports.
The Value of STEM’s Projections
Keep in mind that most of STEM’s clients now are with utilities. Over time, I suspect that this will broaden out. That is because is batter optimization software, called Athena, can generate electricity on demand from several sources.
It uses a SaaS (subscription as a service) revenue model to manage this electricity on demand for utilities. Barron’s magazine quoted Williams Trading analyst Sean Milligan as calling it “pure play virtual power plant provider with SaaS leverage.”
In other words, the company’s value and its energy business are bound to expand to major corporations as it proves its value as an energy asset manager. That is why I believe its robust projections are probably worth believing.
What to Do With STEM Stock
This stock is one of the few SPACs (special purpose acquisition companies) that have shown, and will likely continue to show, that their merger was a success. The stock has risen consistently since it closed at the end of April and is now up to $27.11, up from $26.61 when it closed the deal. But that was after it dipped initially down to a closing price of $16.38 on May 13.
My view that STEM stock is worth 56% more at $42.26, and that hitting this price could well happen in the next year. But even if it takes two years, it is probably worthwhile. That lowers the annualized compounded return to 25.23% annually (I can explain the math if you contact me).
But that is still a very good annual return for most long-term investors. Moreover, I guess you have the comfort of believing that analysts other than just me also feel the stock is likely to rise. Meanwhile, expect to see Stem report another set of excellent earnings for Q2 in mid-August.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.