Three Energy Storage Stocks Going Public in 2020

In her award-winning documentary, The OxyContin Express, Mariana van Zeller showed the world the type of problems that fly under the radar in countries where everyone is consumed by politics. Now she’s back at it in a series called Trafficked. The first episode opens with her penetrating Jamaica’s multi-million-dollar scamming culture which preys on what they call “gullible Americans” who can’t resist the allure of getting rich quickly. Sadly, 95% of these scams are perpetrated against Americans, most often the elderly.

It’s not just the aged who find get-rich-quick stories appealing. Yesterday, Bloomberg published a piece titled IPO Mania Sweeps Over Robinhood Crowd and Stokes a 111% Rally which puts what’s happening into perspective.

While initial offerings are often occasions for appreciation, this year has been different, with first-day rallies almost three times bigger than the average of the last 40 years. 

This has led to an increase in IPO interest from retail investors which has led to more deals, which generate more interest, and the vicious cycle continues.

Credit: Bloomberg

Today, we want to talk about three energy companies going public this year using special purpose acquisition companies (SPACs). For each of these companies, we want to assess their business to determine – for lack of a better word – investablity.

 AnnouncedMerger CompletedPriceReturn
EOS Energy Storage (EOSE)6/26/2020Yes$14.65 +47%
QuantumScape (QS)9/3/2020Yes$64.15 +542%
Stem (STPK) 12/4/2020 No $17.23 +72%

Grid Energy Storage

Green tech investors love the energy storage thesis, but it hasn’t proven to be very lucrative. At the front of the pack when it comes to disappointments in technology would be flow batteries which were expected to store all this renewable energy we’re now generating. At the moment, 96% of the stored energy on this planet is in pumped hydroelectric storage (PHS) facilities that have a lifespan of 50-60 years. What’s important to understand is how energy storage applications dictate which technologies are best suited.

The University of Michigan published a report on U.S. grid energy storage in 2020 noting the various types used along with their associated use cases.

Credit: The University of Michigan

Similar to the rest of the globe, the United States receives nearly all their energy storage needs from pumped hydro storage. That number will decrease over time as nearly 60% of energy storage projects right now are battery-based (electro-chemical).

Credit: The University of Michigan

The report cites lithium-ion batteries as the fastest-growing energy storage technology due to their “high energy densities, high power, near 100% efficiency, and low self-discharge.” Lithium-ion currently has 95% or more market share for the stationary battery industry, and that’s the niche that EOS Energy Storage hopes to displace.

About EOS Energy Storage Stock

Click for company website

Founded in 2008, EOS Energy has spent the last twelve years developing their aqueous zinc battery with $83 million in disclosed funding raised so far. EOS claims to have built the first commercially available battery that does not have a lithium-ion chemistry. Says their recently filed S-1, “Since our inception, we sold only ten Eos Znyth® DC battery systems to our customers.” Here’s what that’s brought in for revenues lately:

  • 2018 – $0
  • 2019 – $500,000
  • 2020 YTD – $35,000

They began commercial shipments of their Generation 2 Eos Znyth® system in 2018, and they’ve been piloting them with some major energy players including the largest renewable energy company in the world, NextEra Energy:

Our largest customer in fiscal year 2019 was Duke Energy, which accounted for 26.1% of our revenues in fiscal 2019. Other customers include utilities, developers and industrial companies such as NextEra Energy, IEP, CHES, Hecate Energy, Shell and Pattern Energy.

It’s most concerning that none of these high-profile customers have given EOS Energy any meaningful revenues.

The glossy investor deck that accompanied the offering describes in great detail how the EOS Energy battery offering has a lower total cost of ownership than lithium. Little hints are dropped throughout that raise questions. A metric which includes both “booked orders” and “letters of intent” is meaningless if the majority of their pipeline consists of non-binding agreements which mean little more than a handshake. Showing customers alongside prospective customers doesn’t make much sense either.

Partners shown are for illustrative purposes only – Credit: EOS Energy Storage

Whatever the value proposition might be, they need to show meaningful revenues before we’ll spend sufficient time investigating the inner workings of their business. We don’t invest in companies that are on the cusp of bringing a product to market, something that seems to be a characteristic of all SPACs, including our next one.

About QuantumScape Stock

Click for company website

Energy can be stored for any number of reasons, including to power electric vehicles. As a startup, QuantumScape crawled into bed with Volkswagen and raised $300 million. That money was used to make the solid-state battery a reality after so many companies have tried and failed. We recently wrote about Investing in Disruptive Tech IPOs in 2021 noting that QuantumScape is a pre-revenue company with no commercial operations that’s up +700% since their SPAC merger was announced. We actually had to read that phrase “no commercial operations” twice because we found it so incredible. This is a company that has been doing R&D for ten years and has yet to make the leap from lab to mass manufacturing which is the most difficult step of all. Any number of things can go wrong, and relying so heavily on a single company – Volkswagen – for success doesn’t bode well either.

We don’t like to invest in pre-revenue companies because traction is such a critical hurdle that many businesses can’t get over. OTC companies are notorious for peddling these growth stories, and there are countless past examples of companies failing to make a product economically viable after a decade of piloting their product with people who didn’t really want to buy it. Even if the company were trading at a -88% discount – the $10 a share that institutional investors paid – we wouldn’t consider investing in it pre-revenue. Too many battery companies have failed at this stage.

About Stem Stock

Click for company website

We saved the best for last, if best means a company with historical revenue data. Just weeks ago, Stem announced their intention to merge with a SPAC called Star Peak Energy Transition Corp. ( STPK ). We’d previously covered Stem in a past article on How Artificial Intelligence Can Improve Renewable Energy. After raising just over $370 million, Stem is ready to capture the pipeline of demand for their AI-powered energy storage solution. Here’s a look at bookings vs revenues for two years of actual and the remaining estimated:

Credit: Stem Investor Deck

Similar to the market, we value software-as-a-service business models, so we’re not liking the small amount of revenues coming from software over the years. On the other hand, the duration of these revenue streams is expected to extend over twenty years.

Credit: Stem Investor Deck

The entire deck is full of charts that show how great the opportunity is. The valuations slide shows how undervalued they are compared to names like Tesla and ChargePoint. They claim to be a leader in systems integrations with 75% market share in California. With plenty of cash in their coffers, they better be able to execute on all that backlog and show us the 348% in revenue growth for next year. After the deal closes, we may take a closer look at their inner workings keeping in mind the $10 per share that institutional investors paid. Even then, we’re becoming less comfortable investing alongside institutional investors.

To Buy or Not to Buy

We’ve previously talked about how paying $10 per share for any SPAC is a fair price because that’s what institutions were willing to pay. History tells us that institutions are often wrong when it comes to valuing companies, and SPACs are no exception. Now that the IPO market is “booming,” nobody wants to leave money on the table. Actual valuations will become more optimistic, more rich, more ambitious. It becomes harder to trust institutional investors who participate in these SPACs because they may simply be playing the greater fool game. It’s a recipe for disaster. If companies want investors with strong hands, they shouldn’t go public using the SPAC route.

As the aforementioned Bloomberg article points out, the last time individuals took over from institutions in the market was the dot-com era. Many would say that’s like comparing apples and oranges. And they’d be right. Today, you have a global pandemic decimating the planet, and exponentially more online traders behaving irrationally. Here’s the growth of online brokerage accounts that led to individuals taking over from institutions in the dot-com era:

Credit: Paper, Online Trading: An Internet Revolution June 1999

Today, Robinhood alone has as many online investors than all online brokerages combined during the dot-com era. With 13 million online traders, Robinhood pales in comparison to Fidelity and Vanguard, each of which has more than 30 million online brokerage accounts. Indeed, today’s situation seems much more problematic than the dot-com era when it comes to retail investors behaving irrationally.

Of the three stocks we’ve looked at, only Stem seems like a company we’d like to take a closer look at once they provide some meaningful information in their regulatory filings. The glossy investor decks say a lot but tell you very little. The Stem deal is expected to close sometime in Q1-2020.

Conclusion

We’ve seen a fair amount of interest from readers on the battery investment thesis with focus on two areas: storage technologies for the grid and exposure to the growth of lithium batteries and the technologies used to improve them. Next up, we’ll take a look at some of the large lithium battery manufacturers out there just in case lithium wins the grid storage race.

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