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Stem Earnings: Profitability in Sight, but Moderating Our Long-Term Outlook

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We have lowered our fair value estimate to $3.50 from $5 for no-moat Stem STEM following third-quarter results. The decrease is primarily driven by moderating our pace of long-term operating margin expansion as we await further scaling of software revenue. We view shares as fairly valued.

Stem’s third-quarter results were largely in line with our expectations. Management slightly lowered guidance ranges for revenue to account for $37 million in guarantees issued related to hardware deliveries in 2022 and 2023. Management remains on track to achieving positive adjusted EBITDA in the second half of 2023 after break-even results in the third quarter. The firm also expects to be adjusted EBITDA positive for the full year 2024, consistent with our modelling.

On a positive note, management announced further expansion of its backlog, as third-quarter bookings clocked in at over $670 million, nearly 3 times the previous quarter. Stem also announced a new deal with SB Energy to provide its modular energy storage system (ESS) solution across a 10GWh project portfolio. Despite positive steps in the quarter, we slightly lower our long-term adjusted EBITDA margins as we await further scaling of high-margin software revenue.

We also update our capital allocation rating to Poor from Standard due to Stem’s leverage profile and negative free cash flow. The company is making good progress on reducing inventory levels, but accounts receivable continues to be a large working capital headwind.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Brett Castelli

Equity Analyst
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Brett Castelli is an equity analyst, energy and utilities, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. His coverage focuses on clean energy companies across renewables and emerging technologies.

Before joining Morningstar in 2021, Castelli spent more than eight years in various analyst roles for TortoiseEcofin, a boutique asset manager. His coverage focused on North America and included companies within traditional energy, electric utilities, and renewables. Additionally, he assisted with the firm's environmental, social, and governance efforts and played an important role in integrating ESG into the investment process. Castelli spent a year at the firm's London office following an acquisition.

Castelli holds a bachelor's degree in finance from the University of Missouri's Trulaske College of Business. He also holds the Chartered Financial Analyst® designation.

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