Stem Earnings: Firm Continues To Focus on Reaching Positive Adjusted EBITDA; Shares Overvalued

We maintain our $5 fair value estimate for no-moat Stem STEM following the company’s second-quarter results. We view shares as overvalued after a rebound in recent months.

Stem’s second-quarter results were broadly in line with our expectations, and the company reiterated its full-year guidance. As a result, we make only minor revisions to our model. Bookings came in light of guidance in the second quarter (despite a large 313 megawatt-hour project addition), while the company reiterated full-year bookings guidance of $1.5 billion. Importantly, Stem remains on track to achieve positive adjusted EBITDA in the second half, aided by seasonally strong revenue contribution (75% of revenue in latter half of the year).

Stem’s long-term strategic plan has been to move toward a software-only business model, with less emphasis on reselling low-margin hardware. Along these lines, the company launched its modular energy storage solution on July 1, which has third parties procure battery hardware. We believe uptake of this offering, software-only deals, and professional services are critical to Stem’s long-term success given superior margins and lower balance sheet utilization.

Less focus on working capital-intensive hardware should benefit company cash flow over time. Stem ended the second quarter with $138 million in cash on hand but expects to end the year with no less than $150 million following abnormally large working capital impacts in the first half. We continue to see Stem’s balance sheet as a constraint on its long-term growth.