Star Peak Energy (NYSE:STPK) is a SPAC that has agreed to merge with Stem, a “smart energy” company which looks to be very well-positioned for the ongoing energy revolution. Given Stem’s outlook, I recommend buying STPK stock at its current levels.
As my headline indicates, however, I do think that Stem faces significant risks, including potentially strong competition.
A Positive Macro Outlook
Using artificial intelligence (AI), Stem says it provides enterprises with “integrated battery storage systems, network integration and battery optimization.”
Additionally, the combination of renewable energy systems and batteries rapidly proliferating, Stem appears to be well-positioned to exploit that trend. Moreover, the company correctly points out that the hugely increased popularity of renewable energy has made managing electricity flow much more 0complex for large businesses, while greatly increasing the difficulty of running grids for utilities.
Spurred by increased pressure to become “green,” many more companies and governments will increase their utilization of renewable energy.
This is also likely to make batteries and grid management more important is the “electrification of transportation,” which in all probability will make electricity even more important and meaningfully more expensive over the longer term.
Importantly, given the latter points, Stem says that it reduces its customers’ “energy costs” by 10%-30%, using its AI. And by “lowering energy costs, stabilizing the grid, alleviating intermittency and reducing carbon emissions, Stem makes itself and STPK stock very appealing.
Also, another company which has benefited significantly from these trends is American Superconductor (NASDAQ:AMSC). The company says that its Grid business, featuring products that help companies and utilities regulate electricity flow and the grid, is delivering consistent growth. American Superconductor refers to these products as “new energy systems.” In Q3, the Grid unit’s sales increased 12% year-over-year. The company noted that the revenue of its “new energy systems” was “driven by… renewable projects in the United States, along with chip factories overseas. “ AMSC stock has surged over 200% in the last 12 months.
Stem Has Many Top-Notch Customers
Among Stem’s customers are the following very large customers: Amazon (NASDAQ:AMZN), WalMart (NYSE:WMT), UPS (NYSE:UPS), Simon Property Group (NYSE:SPG), Raytheon (NYSE:RTX), Boston Properties (NYSE:BXP), and InterContinental Hotels (NYSE:ICE).
Stem reported that it had helped InterContinental Hotels “halt rising energy costs” in California. Harry Hobbs, an Area Director of Engineering for the company, said that Stem’s “real-time data..is the real differentiator” that allowed him to triple his return on investment, according to Stem.
Tough Competition and High Valuation
In addition to American Superconductor, Itron (NASDAQ:ITRI) and ESCO Technologies (NYSE:ESE) offer similar solutions to those of Stem. As the sector becomes more lucrative, much larger companies, such as General Electric (NYSE:GE) and NextEra Energy (NYSE:NEE), could very well enter the sector.
At this time, Star Peak Energy is trading at a post-merger valuation, based on certain assumptions, of $5.5 billion. The company’s revenue came in at just $33 million last year, although it says that it expects its sales to jump to $147 million in 2021 and $347 million in 2022.
Still, based on the 2022 figure, STPK stock is trading at a pro-forma price-sales ratio of 16, which is quite expensive. Nevertheless, it’s less expensive than many of its SPAC peers, and the company, unlike most other SPAC names, expects its EBITDA to turn positive in 2022.
On the other hand, as I pointed out in a recent, previous column, the sentiment towards SPAC stocks has soured somewhat recently, increasing the risk facing Star Point Energy.
The Bottom Line on STPK Stock
Stem’s huge opportunity and its very impressive customer list outweigh the risk facing the shares at this point. Consequently, I advise growth-oriented, risk-tolerant investors to buy the stock.
On the date of publication, Larry Ramer held long positions in AMSC and GE.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.