Petmal
Investment thesis
I continue to see Bloom Energy (NYSE:BE) as one of the more promising green energy companies that continue to execute and exceed expectations, while demonstrating resilient growth in a difficult supply chain environment and pivoting to positive operating profit and cash flows in the near-term.
The company is now at an inflection point with the intention to expand into different markets and geographies. Bloom Energy looks to expand outside of the United States and South Korea, with its sights on Europe. Furthermore, its leadership in Bloom Energy server platform enables it to have confidence to expand into new markets like clean hydrogen, carbon capture and waste to energy. Most importantly, the company continues to reiterate short-term 2022 targets as well as longer-term financial targets. I have written past articles on the company that illustrates my analysis of Bloom Energy’s analyst day, cost challenges it faced previously as well as the benefits the company expects to reap from the Inflation Reduction Act, which can be found here.
Cash war chest
Bloom Energy has boosted cash levels to $669 million as of 3Q22. This was achieved through a new class A common stock offering in August, where the company raised $389 million in gross proceeds.
In my opinion, Bloom Energy raised capital in an opportune time when the stock price was getting ahead of itself and disconnecting from fundamentals. As a result, I think that management’s commentary for the secondary offering done in August was to show its supply chain, developers that it was sufficiently and properly capitalized. With a well-capitalized balance sheet, this will signal to its supply chain that Bloom Energy is going to significantly increase capacity and that it has strong financial resources. This will then encourage the supply chain to invest along Bloom Energy in these projects.
Also, Bloom Energy received notice from SK ecoplant that they intend to execute their second tranche option. This will entail an additional 13.5 million Class A shares at a purchase price of $23.05 per share, with gross proceeds totaling $311 million. In addition, SK ecoplant will be converting their 10 million redeemable convertible preferred shares to Class A shares. Both the conversion and the purchase are expected to close in 1Q23. The proceeds can then be used by Bloom Energy for commercialization of hydrogen solutions and market growth.
Moving to high volume production and increasing capacity
Bloom Energy continues to execute on its promise to increase capacity. It has invested in an expansion of capacity in a new factory in Fremont, California. The company invested $200 million in the additional manufacturing capacity in 2021 to support its growth. I also had the opportunity to see this very factory under construction during Bloom Energy’s investor day.
Bloom Energy management targeted to double their stack manufacturing capacity by end 2022 and they are on track to doing that. In August 2022, the company produced 40% more stacks than it did in July 2022. They are thus on track to double production of its stacks by end 2022 compared to 2021 production levels.
The factory also had flexibility that allowed production of fuel cell stacks and electrolyzer stacks by using the same lines, same equipment and same team members. With this flexibility comes commercial and operational advantages that is unique to the Bloom Energy server platform. I expect that in 4Q22, we will see that as volume ramps up, and the factory executes well, the margin profile will also see an improvement in the quarter.
In addition, Bloom Energy inaugurated its Newark facility on 2 November, that will increase its electrolyzer generating capacity to 2 gigawatts. This Newark facility is a high volume commercial electrolyzer line that, through domestic production of Bloom Energy’s electrolyzers, will help the US improve energy dependence and progress towards a viable and sustainable clean hydrogen industry, especially to decarbonize industries like steel and aviation.
Outlook
Bloom Energy continues to reaffirm the full year outlook for 2022. To recap, Bloom Energy guided that for the year of 2022, revenues are expected to be in the range of $1.1 billion and $1.15 billion, gross margins and operating margins to reach approximately 24% and 1% respectively, and cash flow from operations to be positive.
In particular, management is confident in achieving at least $1.1 billion revenues in 2022, due to the strong pipeline and backlogs as of 3Q22. For the full year 2022 gross margins to reach 24%, this implies gross margins will need to reach 30%. This will be driven by improving product costs as output increases, increasing domestic acceptances as well as higher ITC and a more favorable price mix for its plant acceptances. By achieving 24% gross margins in 2022, this will flow down to positive operating margins and cash flows from operations. For reference, Bloom Energy expects that about 40% of systems built in 2022 will be completed in the fourth quarter. As such, I would continue to expect that unit costs will decrease as the company ramps up on manufacturing. In addition, management planned for the fourth quarter acceptances and revenues to be largely domestic, which benefits from the increase in ITC as part of the Inflation Reduction Act.
Valuation
As I expect that Bloom Energy will achieve positive cash flow from operations and operating margins by the end of 2022, my one-year target price for Bloom Energy is based on its EBITDA multiple. I assume a 19x 2024F EV/EBITDA multiple. I think that Bloom Energy should trade at a slight premium to peers on an EV/EBITDA perspective given multiple factors. First, Bloom Energy is currently growing much faster than its peers, with multiple opportunities for this growth to continue as it expands into different markets and geographies. In addition, its near-term revenues are supported by a strong backlog, and the company looks to achieve profitability at a faster pace than other hydrogen peers. As such, my 1-year target price is $32.60, implying 68% upside from current price levels.
Risks
Operational and execution risks
As Bloom Energy attempts to double capacity in the near-term, that brings operational and execution risks as the company may face roadblock and challenges along the way that might cause them to miss their targets or timeline. In addition, the company is set to expand into different markets and geographies and need to be able to execute well for these new businesses and geographies to succeed.
Political and regulatory risks
The recent Inflation Reduction act has a positive impact for Bloom Energy, but I think that the real risk is in changes in regulatory and political environment. If these turn unfavorable for green energy companies, this could hamper Bloom Energy’s growth and margins profile as incentives are reduced. This will no doubt affect progress in the hydrogen space as incentives are crucial in the development of the sector in the near-term.
Supply chain challenges
I think that the supply chain issues have subsided recently and shipping rates have come down from the peak in late 2021. As of November 2022, I checked that the Baltic Dry Index, a pricing measure for moving major raw materials by sea, has come down by 74% from the peak and is currently at December 2019 levels. That said, Bloom Energy was impacted by the higher input costs and disruption in supply chain in earlier quarters. As a result, there is the risk that a return of supply chain tightness might affect Bloom Energy.
Competitive pressures
With Bloom Energy’s plan to expand into new markets and geographies, this will bring it into the path of other energy companies and competitors. The risk is that Bloom Energy may be unable to compete meaningfully in new markets and geographies, leading to weakness in these markets, and a lower growth and margin profile for Bloom Energy.
Conclusion
I continue to like Bloom Energy as a clean energy play with strong execution and growth prospects. In the current quarter, we saw the company make progress in increasing capacity to support this strong growth. In addition, despite challenging operating conditions, management reiterates 2022 guidance which demonstrates the solid execution by management in the year. Bloom Energy is also well-capitalized with a healthy balance sheet and cash levels sufficient for its near-term growth as it makes sure that its current liquidity position is able to fund future growth. As Bloom Energy looks to expand into new markets and geographies, it continues to expand its addressable market and improve on its growth opportunity beyond its leading Bloom Energy server platform. Based on my valuation estimates for Bloom Energy, I think that the company looks attractive at current levels. My 1-year target price is $32.60, implying 68% upside from current price levels.
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