Business Unit Restructuring And PowerTrack Will Unlock Future Value

Key Takeaways

• Stem's reorganization into distinct units and focus on software growth enhances profitability and revenue through targeted market strategies and scalable, recurring revenue.
  
• Workforce reduction and international expansion strategies improve margins and open significant growth opportunities, boosting the company's competitive position and earnings potential.
  
• Workforce reduction and restructuring may disrupt operations, while paused product development and market challenges threaten long-term growth.

Catalysts

Provides artificial intelligence driven software and services that enable its customers to plan, deploy, and operate clean energy assets in the United States and internationally.

• Stem's transformation into four distinct business units with full P&L responsibility is expected to optimize capital deployment and empower leaders to make market-responsive decisions. This is likely to enhance revenue through targeted growth opportunities and improve profitability by optimizing resource allocation.
  
• The firm's focus on growing software revenue, particularly through PowerTrack, has led to significant growth in solar annual recurring revenue (ARR), indicating a scalable, recurring revenue stream that could increase overall earnings.
  
• The announced 27% reduction in workforce is projected to save $30 million in cash annually, with $24 million expected in 2025, directly improving net margins and profitability.
  
• Strong growth in software and services is driving gross margin expansion, as evidenced by a record 32% GAAP gross margin and a near all-time high non-GAAP gross margin of 46%. This highlights the shift to higher-margin offerings, which should continue to positively impact earnings.
  
• The strategic focus on international market expansion and utility-scale deployments presents significant growth opportunities, projected to drive revenue through increased market share and expansion into new geographies.

Stem Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Stem's revenue will grow by 35.0% annually over the next 3 years.
• Analysts are not forecasting that Stem will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Stem's profit margin will increase from -590.7% to the average US Electrical industry of 10.5% in 3 years.
• If Stem's profit margin were to converge on the industry average, you could expect earnings to reach $37.2 million (and earnings per share of $0.21) by about May 2028, up from $-854.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.9x on those 2028 earnings, up from -0.1x today. This future PE is lower than the current PE for the US Electrical industry at 22.8x.
• Analysts expect the number of shares outstanding to grow by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Stem Future Earnings Per Share Growth

Risks

• The restructuring of Stem's business units and the 27% workforce reduction may lead to short-term disruptions and impact morale, potentially affecting operational efficiency and profitability until the new structure is fully optimized.
  
• The decision to pause development on products like PowerBidder Pro and Asset Performance Management suggests possible challenges in product differentiation and market fit, which could hinder long-term revenue growth in those sectors.
  
• Stem's reliance on the expansion of software and services while reducing dependence on OEM hardware exposes it to potential fluctuations in software adoption rates, which may impact revenue if customers are slow to adopt new offerings.
  
• Tariff-related uncertainties, particularly regarding hardware components, could lead to increased costs. While Stem plans to pass these costs onto customers, this could pressure margins and affect customer demand in the face of such price increases.
  
• The macro-environment, characterized by evolving economic and regulatory policies, presents risks of market instability, which could impede planned revenue growth and profitability if customers become hesitant to invest under uncertain conditions.

Valuation

• The analysts have a consensus price target of $1.067 for Stem 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 $5.0, and the most bearish reporting a price target of just $0.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $356.1 million, earnings will come to $37.2 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $0.42, the analyst price target of $1.07 is 61.1% 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.