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