With Strong Catalysts on the Way, Stem Stock Is Worth Buying

Stem (NYSE:STEM) reported strong second-quarter results, while the company and STEM stock should be meaningfully helped by two bills likely to be passed by Congress and other government initiatives.

STEM stock A concept photo of different energy storage systems.Source: Shutterstock

Also positive for Stem is the continued, rapid transition to renewable energy and electric vehicles. Meanwhile, after the declines of STEM stock in the last few months, the shares’ valuation is quite attractive.

Finally, I believe that Stem is one of a group of companies that’s using artificial intelligence in a way that will make them highly successful.

Strong Q2 Results

Stem’s top line soared nearly 340% year-0ver-year in Q2, reaching $19.3 million. Its gross margin, excluding certain items, came in at -1%, up from -40% in Q2 of 2020.

Most impressively, Stem’s 12-month pipeline jumped 21% versus Q1 to $1.7 billion, and its contracted backlog climbed 13% quarter-over-quarter to $250 million.

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The company continues to expect 2021 sales of $147 million and adjusted 2021 EBITDA of -$25 million.

During Stem’s Q2 earnings call, CEO John Carrington, explained succinctly and effectively that, “Our solution drives customer value by lowering energy costs, reducing dependency on conventional fossil fuel generation, and solving the intermittency challenges posed by solar and wind.”

More specifically, Stem’s AI platform, Athena, increases the efficiency of energy storage systems that work in tandem with renewable energy “by automatically switching between battery power, onsite generation and grid power.” It’s also able to predict solar generation and use that information to determine when to utilize electricity from batteries or solar power.

Help From the Government

As I reported in my previous column on STEM stock, an analyst expects the Democrats’ budget to include a new tax credit for energy storage, along with enhanced tax credits for renewable energy and tax breaks for utilities that would give them more money to spend.

The bipartisan infrastructure deal that passed the Senate, meanwhile, includes appropriations for new transmission and energy storage infrastructure. Stem is well-positioned to obtain a meaningful portion of those funds.

I think that a key reason for the weakness of STEM stock and its peers is concern over whether the infrastructure bill and the budget will pass, amid procedural disagreements between progressive and moderate Congressional Democrats. But I think that the debate is primarily an example of political grandstanding, rather than deep-seated differences. In other words, the progressives and moderates want to show their backers that they are fighting for certain principles.

But in the end, because both factions want to pass legislation to improve the party’s electoral chances, I expect both bills to be approved with fairly slight modifications.

Meanwhile, the U.S. federal governments, state governments and foreign nations are looking to speed up the transition to renewable energy and electrified transportation. As these transitions progress and accelerate, the cost savings enabled by Stem’s Athena platform are likely to continue increasing, causing the company’s top and bottom lines to surge further.

The Right Type of AI

I’m becoming convinced that the most successful AI companies will be those that provide AI that’s tailored to certain, narrow fields, rather than general decision making. Because these narrow AI systems have been fed a great deal of data on specific subjects, I think that they are both better decision makers and much more difficult to replicate than more generalized AI offerings.

For example, Upstart (NASDAQ:UPST), whose AI platform focuses on enabling higher performing bank loans, has done quite well, generating a large amount of revenue and growing rapidly. Since the scope of Stem’s Athena is also narrow, I expect it to also continue growing rapidly.

The Bottom Line on STEM Stock

Stem has multiple, strong, positive, upcoming catalysts, and its narrowly tailored AI should enable it to be very successful. As a result, the shares, whose market capitalization is now less than $3 billion, should prove to be a bargain over the long term.

On the date of publication, Larry Ramer held a long position in STEM stock.

Larry Ramer 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. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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