Motley Fool Hidden Gems Investing - Clean Energy Solutions, Profitability Questions

Episode Date: March 11, 2024

Stem CEO John Carrington is full speed ahead on the clean energy transformation. (00:21) Jason Moser and Deidre Woollard discuss: - Don Julio’s Oscars moment. - If Oscar buzz is still powerful for movie makers. - How Reddit is more like X than Pinterest. (15:49) Ricky Mulvey interviews John Carrington, CEO of energy solutions company Stem on the company’s business model and path to operating profitability. Companies discussed: DIS, PINS, SNAP, META, STEM Host: Deidre Woollard Guests: John Carrington, Jason Moser, Ricky Mulvey Producers: Dylan Lewis, Ricky Mulvey Engineers: Dan Boyd, Mary Long, Rick Engdahl Special Thanks: Jason Hall Learn more about your ad choices. Visit megaphone.fm/adchoices

award season is over but are the big winners the streamers motley fool money starts now welcome to motley fool money i'm deidre woolard here with motley fool analyst jason moser jason how you doing today? Hey, Deidre, just fine. How about you? Good. Did you watch the Oscars? I must admit I did not. It's just not something that really typically crosses my radar, but always an event. And it does. It does seem like there's plenty of headlines out there. There are indeed plenty of headlines out there. You know, we had Dylan and Nell Minow talking about it on Friday's show. No huge surprises. But I think about this a little bit the way I think about the Superbowl in terms of, of the ads. So you've got a smaller ad spend here. I think it

was about, uh, 1.85 million for a 30 second spot, but we saw some, some ads debut. There was a great Rolex ad with movie clips, but there was also a sponsored content moment. So Don Julio, which is, uh, partnered with, uh, the big drinks brand Diageo, uh, celebrities received these mini bottles of tequila during the show for a special toast. It was, uh, these bottles are apparently not available for anyone who wants to go buy them. But it makes me think, does this kind of moment feel genuine? We're seeing so much more sponsored content. Is there any sponsored content that you like? Because so much of this, to me, feels so heavy-handed. It definitely can feel that way. I did run across that Rolex commercial, actually, on Twitter, I think it was,

I'm a little partial to Rolex watches. That actually resonated with me, believe it or not. It's a good ad! I think that when you see this kind of product placement, these kinds of advertisements, to me, it's akin to native advertising on, insert the name of the social media platform here. I think anytime you can see native advertising, it's a more organic and natural fit. You make the placement seem like it just works right in there. It's almost like it's not even an ad. And I think that certainly becomes more relatable for consumers. There's some interesting data I found on this from Ben Labs, which is an agency that specializes in product placement, influencer marketing

and licensing and stuff. They noted that three-quarters of U.S. consumers said they've searched for a product or brand online after seeing it in a TV show or in a film. And then furthermore, nearly 60% of those customers who searched for something said that they ended up making a purchase, either of that same product or a different product from the same brand. I do think that you're seeing brands, you're seeing companies find the value in this native organic placement. My suspicion is, we'll continue to see more of it. Clearly, it has an impact on consumers. Really, when you think about it, the entire Oscars is native advertising. I mean, I used to cover red carpet stuff when I worked for

AOL. So, part of my job back then was finding out who's wearing what, what jewelry are they wearing? I mean, really, the whole thing. And you've got the gift bags, the sweets, everything is attached to a luxury brand. Really, it's a whole big native advertising presentation. Yeah, it's one big commercial. It just doesn't feel that way because it's been married with this event in the priority, right? The focus is placed on that event. But I'll tell you, the advertisers, the product placement, they did just a wonderful job of just integrating the two. It's very seamless. The other thing I was thinking about was how the world of Oscar buzz and movies has changed. Because in the past, way back when, if a movie won a bunch of awards, they'd give it

a secondary release and people would go to the theater and see it. You'd see this boost in ticket sales. Now, I think most of the winners are already available on a streaming service. And one of the things I'm thinking about is, do the awards have less of a value for the companies because they don't get the secondary boost? And or does this have a value to the streamers when they're looking to get the rights to something? The theater and the theater environment has definitely changed. Theatres seem to really become the place for just a handful of productions each year now. I'm not sure that's going to change. I think consumers have found the joy in streaming, getting that theatre experience. You can really set it up however you like it,

never have to leave the comfort of your own home. My suspicion is that theatres will just never really get back to that time where traffic was so much more reliable. But, do they have less value? Maybe. I think, if anything, it makes it more difficult to calculate that value, I think, in the context of a streaming service. Does it result in more subscriptions? Does it result in the potential price increase? It's hard to be able to attribute that to just one winner. But the streamers also have access to a ton of data, including how many hours of whatever content is consumed. That definitely gives them a better idea. I don't know that they lose value, but maybe that value is amortized

over a longer stretch of time. Maybe that's something where streamers gain a reputation for getting access to that award-winning content. Then the consumers more and more feel like, That's a brand that I trust. That's a streaming platform that I know is focused on getting really the best content it can. So, maybe it's not less value, but maybe it's just stretched out and realized over longer periods of time. I want to switch gears and talk a little bit about the Reddit IPO. There's a lot of buzz about this because it's the first social media company to go public since Pinterest in 2019. It's like five years ago. Wow!

It's amazing, isn't it? It really is. I mean, it's like Pinterest a little bit in that its primary source of revenue is ads. It's expected to hit the market with a between $31 and $34 share, giving it a valuation of between $5.8 and $6.2 billion. It's interesting because one of the things I think about is, is it really an ads company in the same way that you could say that Pinterest is? Yeah, I think that's a fair question.

that's a question I ask myself in regard to this platform. I will preface this, I'm not a Reddit user. I've seen it before. Not something that really interests me. But having seen the experience, the user interface, I do wonder how well they are going to be able to monetize that ad spend. Listen, it's really, really difficult in this space if you are a company not named Meta at this point. When you look at social media, and this is not to say this is what will happen to Reddit, but I think there are a lot of clues out there as to what might happen with Reddit. When you look at all of these other social media companies that have gone their own way, whether it's Twitter, which is now X, or LinkedIn, which

was acquired, or Snapchat, which is now Snap, and trying to be a camera company, and they still can't really get it all figured out. There are plenty of examples. Pinterest is another one. I think folks would probably argue that it hasn't quite lived up to its potential. But this is just a really difficult space if you are not a part of that meta family. There's absolutely the opportunity for success out there, but it doesn't strike me as a platform where advertising is going to shine. I don't know that users really want that. They have to be very thoughtful of how they interact with users in regard to the advertisements that are thrown out there. Even examples in Meta's world, when trying to monetize Messenger

and WhatsApp via ads, that has been a long slog. They've had to be very, very thoughtful about how they actually do that. To this day, those are channels that have not really resulted in meaningful drivers for Meta in the context of its whole business. I think that really speaks to some of the challenges that Reddit has here. Yeah, it's a very different world from a Pinterest, where you're reaching an audience that's highly targeted, highly desirable of female shoppers. Reddit, you mentioned X in there. and I think it's very similar. You've got some issues there. You've got some content that maybe not every advertiser wants to be next to. Let's just put it that way. And so, I think that's an

issue. But the other thing I'm wondering about is the Reddit factor, right? Because I don't know if you saw the movie Dumb Money, but I'm thinking about Wall Street Bets. They actually mentioned it in their S-1. Is this IPO going to be a little different, partly because Redditors themselves may make it a little more volatile? That's what Reddit said in the S-1. Well, they definitely can. I'm glad that you brought up Twitter and the advertiser's perspective there, because I do think that is something that Reddit is going to have to deal with. Just from the free speech angle, what's allowed to be said on the platform versus what's not, it is a very difficult balance finding that place where the core user is finding

value and advertisers also aren't scared to be a part of the platform. That is a very delicate balance there. I do not envy Reddit leadership for having to figure that out. But yeah, in regard to Redditors, I think this is going to be an IPO that is very much dictated by the market. I think it's really neat that Reddit is offering this opportunity for Redditors to have a say or be a part of this. I mean, in the context of the whole company, though, it is a very modest take. Reddit is setting aside around 1.75 million shares for certain users and moderators who want to participate in the IPO. But when you look at that and say, after this IPO, the Class A share is outstanding, it's going to

be close to 37 million. We can see that the shares that those Redditors are getting is just a small percentage of that overall count. I would imagine any impact that that has will be very modest and short-lived. Yeah, I think it's more a question of the Redditors talking on WallStreetBets or other forums and potentially moving the market that way. Yeah. Well, I think there's also a reputational thing there. It could paint the company as a company that really values its contributors. It should, granted. That's why they exist. But these are those little things that companies can do that maybe build a little bit more faith, build a little bit

more trust. There is some brand equity that comes with something like this. Time will tell whether it actually has any kind of a material impact. But I think it's a clever way to go public and create a little extra buzz. Well, the other thing that I'm watching with this is where else besides advertising can they get their money? So, I mean, they're still running at a loss. They had a revenue of $804 million for 2023. That loss was $91 million. But they talked in the S-1 about using their data and licensing it for large language models. And, you know, this is sort of fascinating. I mean, It's not material to the company at this point, but I wonder if it could be.

I was talking with our producer, Ricky Mulvey, a little bit about it. This data is already out there. It's already being scraped, but we've seen other companies start to make, suing OpenAI, trying to get that data back. Is there, at some point, value in these massive data sets? Well, I think there is value, and I think we're seeing that just in the lawsuits that are being filed. NVIDIA is dealing with a lawsuit as well, basically over the same thing.

I think that there's certainly the opportunity for that data to be a meaningful driver for the business in time. But there is also a lot that comes with that, parsing through what's true, what's not true. I don't think any of these platforms really are unique in their data. Although, I will say, I do think at least with Pinterest, that's a unique platform. I think people go there with a bit more intent, at least in regard to consumer behavior. When you look at Reddit's S-1, generating revenue via advertising, monetizing commerce on the platform, and licensing data, tell me that doesn't sound familiar. That's just the playbook of any and every social media company out there.

I think really being able to monetize that data in a grand fashion requires a grand platform. I think that's why Meta has done as well as they've been able to do thus far, because it's just so large, because they have so many eyeballs through all of their different social media platforms that they've acquired through the years. I think that's where, with Reddit, the jury's still out there. Absolutely an avenue. I don't know that I would be betting on success on that one just yet. Yeah, I think I'm feeling a little bit like that, too.

I'm definitely curious to see what the market does with it, but this is a company that's been here for a long time. It's been around since 2005. It hasn't really found a way to be profitable yet. I'm not sure that going public is a silver bullet, magic thing there that's going to make it happen. No, it's not. When you look at their user numbers. Their user numbers are bad. They got 73.1 daily actives, 267.5 weekly actives. Compare that to something like Pinterest. Pinterest is $500 million. Revenue-wise, Pinterest, $3 billion in annual revenue. Reddit, closing in on that thing, is about $800 million. There's plenty of opportunity for Reddit to grow. But I also wonder with Reddit, like you said,

it's been around for a while. I wonder if we're not going to see something similar to what we saw with Twitter in that it's a unique platform. It's not for everybody. Have they picked the low-hanging fruit? Acquiring new users, I think, is going to be a big challenge for this platform, particularly given the nature of the platform. It can be a little saucy over there sometimes. Again, indeed. Thanks for bringing it down with me today, Jason. Thank you. You just found out that your sales team is at risk of missing quota. Don't panic.

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clean energy solutions and services, to discuss its razor and blades economic model and road to operating profitability. We're talking to a lot of listeners today who are not as familiar with your company. And I think one way I like to position it for an introduction is the migraine level problems. This comes from my colleague, Tim Byers. So can you describe some of the migraine level problems that Stems helps solve through the hardware business and through the Athena software. Sure. Yeah. And maybe just a quick step back on the business to level set everybody. But we really think of the company as the market leader in renewable software for energy storage and solar asset performance management. And effectively, we provide software and services

to our global customer base. The software that you highlighted is Athena. That's our platform. and it's an ai driven clean energy platform we've been ai before i was cool it's been a long time that we've coined ai as part of our uh of our platform it's an important part a lot of it is prediction analytics that are required both on the cni side as well as the uh the developer side and just kind of put some numbers on the business about 40 billion dollars of solar and storage assets are managed on the Athena platform to optimize operation, manage uptime. And that's been about 10 years in the making. So a little background on the business from that front. I'd say from a kind of use case standpoint, we effectively take these very large batteries and

in a Fortune 500 or a large office complex, we will put the system in, we'll help them control their energy costs anywhere from 10% to 30% savings. A lot of that's around the demand charge manager, but there's also a lot of additional value we can provide the customers if they want to participate. Markets or whatever other use case, backup power, whatever use case they may have, all of that's operated by the Athena platform without any change to their operation. And then on the developer side of the utility scale side, we're helping them provide battery storage for additional energies that relates to solar, as it relates to the grid hardening, grid stability. So kind of both sides of the market we're playing. We don't play in

Resi, kind of front-of-the-meter, behind-the-meter. CNI are a couple of our large markets. So I want to talk about one point there. So the way I understand Athena working, or one big application, is you have a huge battery on-site that maybe STEM has helped helped the customer install there. And then the Athena software for, let's say, a large Walmart will be able to pick between the battery, the grid, and a backup generation system. So they're saving money on the energy costs. Yeah. I mean, effectively on that case, so at a CNI level, the way the utility charges them for their energy cost is the demand peak. And it's every month. So your highest demand moment for a 15-minute period is effectively

where you're set for your demand charges for the entire month. So it's very material. And if you think about your Walmart example, I mean, energy is in their top three accounts payable. So it's a significant part of their balance sheet. So saving 10% to 30% on that specific account, and they are a customer, by the way, is very material. So it's predicting what that energy use case will look like relative to weather, relative to the time of day of how many customers they expect, et cetera. And then our system's injecting itself sometimes many times a day, sometimes not at all, just depending upon where we've set that demand charge level to be. And then obviously we can aggregate those resources in a specific zone and actually

commit energy to the grid if there's a grid instability event, if they're enrolled in the utility program, which most of our CNI customers are. Yeah. And the grid instability events are happening more often with extreme weather. When you're talking about the backup systems, this is for individual customer types, like a large, as you said, office park or a large department store to back up energy there, not necessarily an entire neighborhood or an entire city. That's right. And you know, Ricky, it's a pretty limited use case because we typically have a two hour battery. So it's not as though you're going to run this for a week, but it can help transform over to, you know, backup generators or give the utility time enough to get the power

back online. We've talked a little bit about the software part. I want to talk about the hardware part because that's where most of the revenue comes from. Software is where most of the margin comes from. And a lot of this is the resale of essentially third-party batteries. Can you talk about what the hardware part of your business looks like and how much of that is needed in order to sell the software systems to these customers. Yeah, I mean, the hardware is a big component. It's really not so much driven by our desire to sell hardware. In fact, if you look at our analyst day that we did a couple of years ago, we projected the hardware sales and margins to come in because it's a bit of a pass, really. But our customers are demanding that we provide

both. So we have 100% attach rate with our Athena platform to every hardware unit we sell. And in many cases, we're doing more and more software. That's really the play that we want to do long-term. But our customers don't want to just have, in many cases, only a software solution or only a hardware solution. So we bring a tremendous amount of domain expertise by providing both of those services. From a hardware standpoint, really deal with all the top-tier OEMs globally. A lot of that comes from Chira today, although with IRA, we can get into that later. But tremendous amount of capacity being added here in the U.S. One fairly recent addition to your Athena platform is a program called PowerBidder Pro.

I know you signed a partnership with Mercuria. First, can you talk about what PowerBidder Pro adds to the Athena platform as you've talked about this comprehensive software solution? Yeah. Power Meter Pro is a really exciting platform for us. It's a pure SaaS model. It's something that we launched in the third quarter of 2023. And some of your listeners might have been with RE+, which is a very large renewable show that, in this case, happened to be in Las Vegas, where we did a variety of demos around this. A lot of the industry analysts saw it and some very nice coverage around it. But our momentum on this really is focused on the one we just announced in our arranged call in ERCOT. And what this product does is it provides real-time

performance metrics, industry-leading analytics, because we have a tremendous amount of data from our history in the space. And most importantly, it allows our customers to customize their trading strategies. Many solutions that traders have are very much kind of black box. And what we've done is we've taken the black box approach with the bespoke approach, put them together and allow our customers working with us to actually dial in exactly what they want with a variety of other incoming analytics that can provide real-time insight to what they should change or do to maximize their trading dollars. And I think Mercuria is a very interesting partner because obviously they're a very significant energy trading side, but they've also committed about

50% of all of their investment dollars into the energy transition. And they're planning a 20 gigawatt, 20 gigawatt renewable energy pipeline that again, Athena is not going to be on a hundred percent of this, but it's a great partner to have. And what I like about it is it's a real attribute to the strength of the portfolio, specifically this app, because they're some of the best traders, if you will, in the energy segment in the country. And ERCOT is essentially the Texas grid, if you will, right? As a part of your earnings presentation, this year, STEM is projecting a positive operating cash flow of about $50 million. That's going to be a significant milestone for your company. What's the story leading to that?

How are you crossing that barrier? Yeah, we think it's very differentiated. So it's actually over 50. The minimum is 50. Effectively, I'd say the first half would be characterized, Ricky, by collections around our accounts receivable. So our AR balance is about $300 million, which is good and bad. The good news is it's there. We're going to collect it. The bad news is it's probably 100 more than we'd like for it to be. But we continue to work that And so, being free cash flow as well as EBITDA positive is, again, highly differentiated. We're laser focused. Are we committed to be EBITDA positive in the second half of last year?

And we executed on that milestone that we set forth in February of 2023. And we did it. And so, that itself was important. But this year is a big focus around free cash flow. And I'm confident we'll meet that metric as we outline in our reach. So I want to talk about the cash position and accounts receivable. As you mentioned, this is one of my colleagues, Motley Fool contributor, Jason Hall follows your company pretty closely. And he recently, he zoomed in on the cash position and the cash projections. So

last quarter, you ended essentially with $125 million cash position. You were forecasting that to grow to $150 million by the end of last year. But in fact, the cash decreased to $114 million. A lot of this, you cited, was due to delayed customer payments. And I think the growth of the accounts receivable you were just talking about, what should investors understand about what's going on here? Yeah, I'd say a couple of things. what is, look, it was a miss. We set 150. We communicated that to the street. We came in at 114. And then we had 22 million come in on January 4th. So you combine the two, it's 136. But my view is 114, because that's what we said. It's really about the receivables that we have. We're

collecting them now. We're going to continue to collect them. And I think the street is just going to have to be patient for us to prove that we can do it. The good news is, as I said, it's there. It's not, in our view, a big risk on the collections piece. It's a timing. And Bill Bush, our CFO, highlighted this on the call. It was probably the most unusual time in his 10 years, as he said, on the kind of CFO scope, if you will, of trying to collect money. Everyone was hoarding cash at the end of last year. And I think it was a tough environment. We do feel like it's loosening, as is indicated by the $22 million I highlighted in the first week of January. We feel confident in the pre-cash flow number or the operating cash flow that we've put out

of generating at least $50 million. And more importantly, I think, Ricky, we've been very clear, we do not intend to issue any equity or equity-linked securities in 2024. So we intend to carry our own water, be profitable going forward. We've got some fools listening right now. So Stem is a fool-wrecked company. That's how that sentence should be constructed. And they've been on a difficult ride since the company went public via SPAC. These are long-term investors who are thinking again, in terms of those three, five, 10 year periods, but they've still been on a, they've, they've been on a difficult journey with this, uh, with this company. What is, what's your message to those, those long-term investors hanging on, but, but

going through a tough time with this one? Yeah. I mean, look, I think we're not that unusual, unfortunately, for the space. When you start to look at some of the ETFs, which is kind of the bundle of the solar. I mean, you don't really have an ETF specific to storage, but the clean tech or clean energy transition segments had a tough, tough, tough year, tough year and a half. I mean, from my standpoint, as I said at the onset, I think even a positive free cash flow is highly differentiated. We're not going to need additional capital. I think that is a massive driver of enterprise value if we can execute on that plan. And you know i i just think that we've got a lot of very strong long-term investors out there that

we spent yesterday we talked to the top 15 they were very bullish on the company love the strategy and it's kind of a it's a tough environment go execute and uh good things will happen so nope nobody uh nobody's more disappointed in some of the performance that uh than me and the management team related to stock price, but we feel like if we actually, you know, what we're saying we're going to do in this last call and the 2024 guidance, then good things will happen. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based only on what you hear. I'm Deidre Willard. Thanks for listening.

We'll see you tomorrow. We'll be right back.