Stem Announces Convertible Note Offering

We reduce our fair value estimate for no-moat Stem STEM to $6 per share from $8 following the company’s March 30 convertible debt offering. Our decreased fair value estimate is a result of a lower long-term margin profile as we expect a more gradual improvement in profitability. Stem shares sold off 10% following news of the convertible debt offering, but we encourage investors to remain on the sidelines.

On March 30, Stem completed a $200 million offering of 4.25% convertible senior notes due 2030. The company expects to use approximately $100 million of the proceeds to purchase a portion of its 2028 convertible senior notes, which are currently trading at approximately $0.60 on the dollar. The remaining proceeds are expected to be used for a capped call transaction ($23 million) and general corporate purposes. The notes have a conversion price of $7.13 per share ($11.18 when factoring in capped call transaction), which is above our revised fair value estimate.

We understand the logic of repurchasing a portion of outstanding senior notes given their depressed trading level, but doing so via a new convertible issuance raises questions. We expected the company might take action to bolster liquidity (ended 2022 with $250 million in cash), but had thought the company was more likely to pursue an alternative method (such as credit facility).

Stem’s focus in 2023 is on achieving positive adjusted EBITDA in the second half of the year. If achieved, it should reduce Stem’s dependence on capital markets going forward. We expect cash burn for the full year of 2023 to be approximately $50 million.