In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:
- Don Julio's Oscars moment.
- If Oscar buzz is still powerful for moviemakers.
- How Reddit is more like X than Pinterest.
Motley Fool host Ricky Mulvey interviews John Carrington, CEO of energy solutions company Stem, on the company's business model and path to operating profitability.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on March 11, 2024.
Deidre Woollard: Award season is over, but are the big winners the streamers? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Jason Moser. Jason, how are you doing today?
Jason Moser: Hey, Deidre, just fine how about you?
Deidre Woollard: Good. Did you watch the Oscars?
Jason Moser: I must admit I did not. It just not something that really typically crosses my radar, but always an event and it does seem like it's plenty of headlines out there.
Deidre Woollard: There are indeed plenty of headlines out there. 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 Super Bowl in terms of the ads. You've got a smaller ads spend here, I think it was about 1.85 million for a 30-second spot, but we saw some ads debut, there was a great Rolex ad with movie clips, but there was also a sponsored content moment.
Don Julio, which is partnered with the big drinks brand Diageo. Celebrities received these mini bottles of tequila during the show for a special toast. These bottles are apparently not available for anyone who wants to go buy them. But it makes me think does this 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.
Jason Moser: Definitely can feel that way. I did run across that Rolex commercial actually on Twitter, I think it was, and just a little partial to Rolex watches, that actually resonated with me, believe it or not.
Deidre Woollard: It's a good ad.
Jason Moser: I think that when you see this product placement, these advertisements, to me this is akin to native advertising on, insert the name of a 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. I think that certainly becomes more relatable for consumers.
There's some interesting data I found on this from BENlabs, it's an agency that specializes in product placement, influencer marketing, and licensing and stuff. But they noted that three-quarters of US consumers said they've searched for a product or brand online after seeing it in a TV show or in a film. 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 because clearly, it has an impact on consumers.
Deidre Woollard: Really when you think about it, the entire Oscars is native advertising. I used to cover red carpet stuff when I worked for AOL, so part of my job back then was finding out, whose wearing what, what jewelry are they wearing, really the whole thing. You've got the gift bags, the suites, everything is attached to a luxury brand. Everything is really, it's a whole big native advertising presentation.
Jason Moser: It's one big commercial, it just doesn't feel that way because it's been married with this event. The priority, the focus is placed on that event, but I'll tell you, the advertisers, the product placement, they do a wonderful job of just integrating the two, so it seems very seamless.
Deidre Woollard: 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, not all, 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 this secondary boost. Or does this have a value to the streamers when they're looking to get the rights to something?
Jason Moser: The theater and the theater environment has definitely changed. The theater seem to really become the place for just a handful of productions each year now, and I'm not sure that's going to change. I think consumers have found the joy in streaming, getting that theater experience and you can really set it up however you like and never have to leave the comfort of your own home. My suspicion is that theaters 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 is 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, and then the consumers more and more feel 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. Maybe it's not less value, but maybe it's just stretched out and realized over longer periods of time.
Deidre Woollard: 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, five years ago, wow.
Jason Moser: It's amazing, isn't it? Flies right by.
Deidre Woollard: It really is. 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-$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?
Jason Moser: 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, it just not something that really interests me, but having seen the experience, the user interface, I do wonder how? I wonder how well they are going to be able to monetize that ad spend. Listen, it's really difficult in this space if you are a company not named Meta at this point. I think that 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. They're just plenty of examples, and Pinterest is another one. I think folks would probably argue that hasn't quite lived up to its potential. But I mean, this is just a really difficult space if you are not a part of that Meta family and there's absolutely the opportunity for further success out there, but it just 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. Because you look at 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 thoughtful about how they actually do that, and 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.
Deidre Woollard: 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 [laughs] to be next to, let's just put it that way. I think that's an issue, but the other thing I'm wondering about is the Reddit factor because I don't know if you saw the movie, Dumb Money, but I'm thinking about WallStreetBets, they actually mentioned it in their S1. 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 S1.
Jason Moser: They definitely can. I am glad that you brought up Twitter and sort of 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 set 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 and I do not envy Reddit leadership we're having to figure that out.
But 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. In the context of the whole company though it is a very modest take. I think Reddit is setting aside around one and three-quarter million shares for certain users and moderators who want to participate in the IPO. But when you look at that and say that after this IPO, the Class A shares outstanding is going 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, so I would imagine any impact that that has, it will be modest and it will be short-lived.
Deidre Woollard: I think it's more a question of the Redditors talking on WallStreetBet or other forums and potentially moving the market that way.
Jason Moser: I think there's also a reputational thing there, it could paint the company as a company that really values it's contributors. It should, granted and I mean 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.
Deidre Woollard: The other thing that I'm watching with this is where else besides advertising, can they get their money? They're still running at a loss. They had a revenue of 804 million for 2023, net loss was 91 million. But they talked in the S1 about using their data and licensing it for large language models, and this is fascinating and 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 suing OpenAI trying to get that data back. Is there at some point value in these massive data sets?
Jason Moser: I think there is value and I think we're seeing that just in the lawsuits that are being filed. Nvidia's is dealing with a lawsuit as well, basically over the same thing. I think that there is certainly the opportunity for that data to be a meaningful driver for the business and 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, and 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.
But when you look at Reddit's S1, generating revenue via advertising, monetizing commerce on the platform and licensing data, tell me that doesn't sound familiar, that is 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 with Reddit, the jury is still out there. Absolutely an avenue, I don't know that I would be betting on success on that one just yet.
Deidre Woollard: 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 it's been here for a long time. It's been around since 2005, hasn't really found a way to be profitable yet. I'm not sure that going public is a silver bullet and magic thing there that's going to make it happen.
Jason Moser: No, it's not. When you look at their user numbers, their user numbers are bad. They got what, 73.1 daily actives, 267.5 weekly actives. Compare that to something like Pinterest, Pinterest is 500 million. You look at this revenue wise, Pinterest, three billion dollars in annual revenue, Reddit, closing on, I think it's about 800 million, so 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, so 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 it's going to be big challenge for this platform, particularly given the nature of the platform, and it can be a little saucy over there sometimes.
Deidre Woollard: It can indeed. Thanks for bringing it down with you today, Jason.
Jason Moser: Thank you.
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Deidre Woollard: This SPAC has been beaten up, but its customer orders haven't slowed down. My colleague, Ricky Mulvey caught up with John Carrington, CEO of Stem Energy, a provider of clean energy solutions and services to discuss its razor and blades economic model and road to operating profitability.
Ricky Mulvey: We're talking 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 Beyers. Can you describe some of the migraine level problems that Stems help solve through the hardware business in through the Athena software?
John Carrington: Sure, maybe just a quick step back on the business to level-set everybody. But we really think of the company is the market leader in renewable software for energy storage and solar asset performance management and effective when 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 AI was cool. It's been a long time that we've coined AI as part of our platform. It's an important part of it.
A lot of it is prediction analytics that are required both on the CNI side as well as the developer side. 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 up time, and that's been about 10 years in the making. Little background on the business from that front, I'd say from a use case standpoint, we effectively take these very large batteries and a Fortune 500 or large office complex, we will put the system and will help them control their energy costs anywhere from 10-30% savings.
A lot of that surround the demand charge manager, but there's also a lot of additional value we can provide the customers if they want to participate in markets or whatever other use case, backup power, whatever use case they may have, all of that, it's operated by the Athena platform without any change to their operation. Then on the developer side of 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 both sides of the market we're playing. We don't play in resi, front-of-the-meter, behind-the-meter, CNI or a couple of our large markets.
Ricky Mulvey: I want to talk about one point there. The way I understand Athena working or one big application is you have a huge battery on-site that maybe Stem has helped the customer install there. Then the Athena software, 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.
John Carrington: Yes. Effectively on that case. At a CNI level, the way the utility charges now for their energy cost is the demand peak, so it's every month. 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. If you think about your Walmart example, energies are their top three accounts payable, so it's a significant part of their balance sheet. Saving 10-30% on specific that, and they are a customer, by the way, is very material.
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, etc. There are systems in checking itself. Sometimes many times a day, sometimes not at all, just depending upon where we've set that demand charge level to be. Then obviously we can aggregate those resources at a specific zone and actually commit energy to the grid if there's a grid instability of that, if they're enrolled the utility program, which most of our CNI customers are.
Ricky Mulvey: Yeah, the grid instability events are happening more often with extreme weather. When you 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 backup energy. They're not necessarily an entire neighborhood or an entire city.
John Carrington: It's a pretty limited use case because we'll typically have a two-hour battery. It's not as though you're going to run this for a week, but it can help transform over to backup generators or give the utility time enough to get the power back on line typically.
Ricky Mulvey: 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. Softwares, where most of the margin comes from. 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?
John Carrington: 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. We have 100% attach rate with our Athena platform to every hardwares unit we sell. In many cases are 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 the hardware solutions. 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 Shire today, although with IRA, we can get into that later, but tremendous amount of capacity being added here in the US.
Ricky Mulvey: One fairly recent addition to your Athena platform is a program called PowerBidder Pro and they 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?
John Carrington: PowerBidder 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 Plus, it's a very large renewable show. In this case happened to be in Las Vegas where we're doing variety of demos around this and a lot of the industry analysts saw it. Some very nice coverage around it. But our momentum on this really is focused and the one we just announced in our earnings call in ERCOT.
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. Most importantly, it allows our customers to customize their trading strategy. Many solutions that traders have are very much black box. What we've done is we've taken black box approach with a 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 income and analytics that can provide real-time insight to what they should change or do to maximize their trading dollars.
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% all their investment dollars into the energy transition. They're planning a 20-gigawatt renewable energy pipeline. Again, Athena is 100% on this, but it's a great partner to have. 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, of energy segment in the country.
Ricky Mulvey: ERCOT is essentially the Texas grid, if you will. As 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?
John Carrington: We think it's very differentiated, so it's actually over 50. A minimum is 50. Effectively, I'd say the first half would be characterized Ricky, by collections around our accounts receivable. Our IRA balance is about $300 million, which is good and bad. The good news is, it's there, we've collected. The bad news is it's probably 100 more than we'd like for it to be, but we continue to work that.
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. We did it. That itself was important. But this year is a big focus around free cash flow. I'm confident we'll meet that metric as we outlined in our earnings call.
Ricky Mulvey: I want to talk about the cash position and accounts receivable. As you mentioned, one of my colleagues, Motley Fool contributor, Jason Hall follows your company pretty closely. He zoomed in on the cash position and the cash projections. 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 the growth of the accounts receivable you were just talking about. What should investors understand about what's going on here?
John Carrington: I'd say a couple of things. It was a miss we said 150. We communicated that to The Street. We came in at 114, and then we had 22 million coming in on January 4th. Combined the two, it's 136, but my view is 140 because that's what it was. It's really about the receivables that we have. We're collecting them now or going to continue to collect them. 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 of big risks on the collections piece. It's a timing. Bill Busher CFO highlighted this on the call. It was probably the most unusual time in his 10 years, as he said, on the CFO's 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 it's listening, as is indicative by the 22 million I highlighted in the first week of January. We feel confident in the free cash flow number or the operating cash flow that we've put out of generating at least 50 million. More importantly, Ricky, we've been very clear that we do not intend to issue any equity or equity-linked securities in 2024. It's in the carrier on water, be profitable. Going forward.
Ricky Mulvey: We've got some Fools listening right now. STEM is a Fool rec'd 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 3, 5, 10 year periods, but they've been on a difficult journey with this company. What's your message to those long-term investors hanging on but going through a tough time with this one?
John Carrington: Look, I think we're not that unusual unfortunately for the space when you start to look at some of the ETFs, which is the bundle of the solar. We don't really have an ETF specific to storage, but the clean texture, clean energy transition segments had a tough year-and-a-half. From my standpoint, as I said at the onset, I think EBITDA 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.
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, loved the strategy and it's a tough environment, go execute and good things will happen. Nobody is more disappointed in some of the performance than me and the management team related the stock price. But we feel like if we execute on what we're saying we're going to do in this last call, in the 2024 guidance then good things will happen.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Deidre Woollard has positions in Meta Platforms, Nvidia, and Walmart. Jason Moser has no position in any of the stocks mentioned. Ricky Mulvey has positions in Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms, Nvidia, Pinterest, Stem, and Walmart. The Motley Fool recommends Diageo Plc. The Motley Fool has a disclosure policy.
