Long Duration Storage Demand Will Drive Future Upside Despite Near Term Execution Risks

Catalysts

About ESS Tech

ESS Tech develops long duration iron flow battery systems that provide safe, sustainable grid scale energy storage.

What are the underlying business or industry changes driving this perspective?

• Acceleration of grid decarbonization and data center power demand is increasing the need for 10 hour plus storage, positioning Energy Base as a preferred solution and supporting higher long term revenue growth from larger project sizes.
• The first commercial scale Energy Base deployment with Salt River Project, combined with a growing pipeline centered entirely on this platform, can convert validation projects into multi hundred megawatt follow on awards, improving revenue visibility and earnings leverage.
• Ongoing shift in RFPs toward long duration specific procurements, where ESS competes against fewer qualified alternatives than in 4 hour lithium dominated tenders, should support pricing power and structurally better gross margins.
• U.S. sourced, non flammable iron flow technology aligns with regulatory and utility preferences for domestic, resilient and sustainable infrastructure. This can unlock additional incentive support and improve project economics, benefiting net margins over time.
• Disciplined cost control, vendor optimization and scaling manufacturing for 2026 deliveries create operating leverage as volumes ramp. This allows fixed costs to grow more slowly than sales and supports a path toward improved operating income and earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming ESS Tech's revenue will grow by 141.0% annually over the next 3 years.
• Analysts are not forecasting that ESS Tech will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ESS Tech's profit margin will increase from -1045.3% to the average US Electrical industry of 11.8% in 3 years.
• If ESS Tech's profit margin were to converge on the industry average, you could expect earnings to reach $9.9 million (and earnings per share of $0.41) by about December 2028, up from $-62.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.6x on those 2028 earnings, up from -0.6x today. This future PE is lower than the current PE for the US Electrical industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.03%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The transition from legacy products to the new Energy Base platform is already creating revenue volatility, as shown by the drop from 2.4 million in the second quarter to 200,000 in the third quarter. If commercialization or field validation is delayed, long term revenue growth could fall short of expectations and push out the path to scale.
• ESS remains deeply loss making with a quarterly net loss of 10.4 million and only 3.5 million of cash and equivalents at quarter end. Reliance on external financing, including the Yorkville facility and a 75 million at the market equity program, could lead to shareholder dilution or funding gaps that weigh on earnings and net margins over time.
• Despite strong secular tailwinds for long duration storage, ESS still faces technology and competitive risk from both lithium ion providers in storage agnostic RFPs and other emerging long duration solutions in dedicated tenders. If its iron flow batteries fail to sustain a cost and performance edge, pricing pressure could compress gross margins and limit future earnings power.
• The company’s long term growth strategy depends on converting pilot projects like the 50 megawatt hour Salt River Project installation into much larger 100 to 200 megawatt follow on awards. If utilities or data center customers are slow to adopt or scale these deployments, the commercial pipeline may not translate into contracted backlog, constraining revenue and operating leverage.
• ESS is managing through a period of leadership transition and aggressive cost discipline while simultaneously scaling manufacturing and supply chain capabilities for 2026 deliveries. Any execution missteps, vendor issues or delays in productization of Energy Base could increase operating expenses faster than sales, worsening operating losses and delaying sustainable positive earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $2.75 for ESS Tech based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.5, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $84.3 million, earnings will come to $9.9 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $1.93, the analyst price target of $2.75 is 29.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.