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Stem Earnings: Progress Toward Profitability, but Balance Sheet Likely To Limit Long-Term Growth

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Stem Inc Class A
(STEM)

We have lowered our fair value estimate for no-moat Stem STEM to $5 per share from $6 following the company’s first-quarter results. The decrease is a result of reducing our long-term deliveries forecast due to balance sheet constraints. We view the shares as fairly valued.

Stem is off to a solid start against its 2023 guidance. Revenue for the first quarter came in above guidance, and non-GAAP gross margin (19%) was at the high end of full-year guidance of 15%-20%. Most importantly, the company reiterated that it expects to achieve positive adjusted EBITDA in the second half of 2023.

Stem’s long-term strategic plan has been to move toward a software-only business model, with less emphasis on reselling low-margin hardware. On this front, the company said it’s slowing the growth of future hardware procurement in 2024 and having more discussions on software-only deals. In addition, it is progressing with its modular energy storage solution, which has third parties procure battery hardware. We agree with this strategic direction but would like to see further evidence of software-only bookings.

Liquidity improved with the $240 million convertible senior note issuance in April. Following the offering, the company has roughly $300 million of cash and investments on its balance sheet. Cash burn should improve in the coming quarters as Stem strives toward positive adjusted EBITDA and reduced working capital associated with hardware procurement.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Brett Castelli

Equity Analyst
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Brett Castelli is an equity analyst, energy and utilities, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. His coverage focuses on clean energy companies across renewables and emerging technologies.

Before joining Morningstar in 2021, Castelli spent more than eight years in various analyst roles for TortoiseEcofin, a boutique asset manager. His coverage focused on North America and included companies within traditional energy, electric utilities, and renewables. Additionally, he assisted with the firm's environmental, social, and governance efforts and played an important role in integrating ESG into the investment process. Castelli spent a year at the firm's London office following an acquisition.

Castelli holds a bachelor's degree in finance from the University of Missouri's Trulaske College of Business. He also holds the Chartered Financial Analyst® designation.

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