Petmal
Investment thesis
Bloom Energy (NYSE:BE) is one of the few clean energy companies that are executing really well in a challenging supply chain environment, while seeing strong growth momentum in revenue growth. The company is currently at an inflection point as it grows into different geographies and market segments. Bloom Energy is expanding its businesses rapidly as it looks set to expand geographically beyond the United States and South Korea, into Europe. Furthermore, the company is leveraging its leadership in its Bloom Energy server into other market segments like waste to energy, clean hydrogen, carbon capture as well as marine. The company also looks set to meet its 2022 targets while reiterating its ambitious long term financial targets. I have written previous articles on Bloom Energy that can be found here.
Benefits from the Inflation Reduction Act
As a company that is playing an important role in decarbonising the world, Bloom Energy stands to gain much from the Inflation Reduction Act. Bloom Energy’s United States electrolyzer business will benefit from the hydrogen production credit, which provides a hydrogen production tax credit for clean hydrogen production during a 10 year period from when the clean hydrogen facility begins operations. In addition, with the increased level of availability of clean hydrogen in the United States, this helps to boost the entire clean hydrogen ecosystem, with potentially an increased demand for Bloom Energy’s hydrogen powered energy servers.
Another way Bloom Energy stands to benefit is from the increasing of the investment tax credit for the company’s energy servers as well as the extension of the investment tax credit that will continue to help Bloom Energy’s domestic power business in the United States. Other incentives for electric vehicles could also spur interest in Bloom Energy’s power charging solutions, while the increased incentives for carbon capture makes carbon capture even more attractive with our energy servers.
As such, it is clear that the Inflation Reduction Act is a game changer for Bloom Energy as it touches all across the business and helps to accelerate different segments of its business.
Second quarter showed near-term cost challenge could prevail
During the second quarter, Bloom Energy reported EBITDA numbers that met market expectations and with stronger than expected revenues. Revenues were up 6% year on year to $243 million, while adjusted EBITDA was at negative $8 million. These results came as the revenue beat came from better-than-expected acceptances but cost challenges continued.
I think that Bloom Energy is executing well in a difficult supply chain environment. For Bloom Energy, as a result of the challenging supply chain situation, it is affecting the business in terms of availability as well as the pricing of products. As a result, management has been working to make sure that firstly, Bloom Energy is able to meet customer demands by continuing to deliver in difficult times, while also ensuring that its suppliers continue to invest for the future to keep up to pace with the high expected demand from Bloom Energy. As a result of these supply chain issues, unit costs in the quarter were slightly higher than expected.
During the quarter, gross margins improved 1.6 percentage points from the previous year to 20% in the current quarter in 2022. The unit product costs are expected to trend downwards towards the end of the year as the company continues to ramp up on its new Fremont manufacturing plant. As a result of the increased capacity, the company was then able to get better pricing from the newer acceptances and thus, these will then flow into better gross margins in future periods.
The full year 2022 guidance was reiterated despite the challenging supply chain situation that Bloom Energy is experiencing. This means that management is still expecting revenues of around $1.1 billion to $1.5 billion for the year, with gross margins of 24% and operating margins of 1%. The company also expects to have positive cash flow from operations for the year of 2022. All these implies that management expects to see growing acceptances going into 3Q22 and that the momentum will continue into 4Q22. Also, the margins are expected to improve in second half of 2022 compared to the first half, as more capacity comes online.
With $414 million in cash available as of 2Q22, the company has sufficient liquidity needed to fund the investments in increasing manufacturing capacity as well as to continue on its research and development efforts. The company also had about $31 million in non-recourse debt eliminated in 2022 that helped to further simplify their financial reporting and improve margins.
Analyst day boosts confidence in Bloom Energy
Apart from reiterating their 2022 outlook, they continue to have confidence in achieving their long term goals of achieving 30% to 35% revenue CAGR, 30% gross margins and 15% operating margins. They expect to drive revenue growth from geographical expansion as well as increase in use cases, while the margin improvement will come from their efforts to reduce costs over time. Bloom Energy has seen their average cost per kWh drop from $0.11 in 2015 to $0.06 today, and they continue to target $0.04 in 2025. Most of these cost improvements will come from increasing power density as well as driving scale efficiencies in the product segment. By the end of 2022, with the new Fremont plant, the company will have 580 MW of annual manufacturing capacity, and by 2023, they expect to have more than 1GW of annual capacity, with targets to reach 8 GW to 10 GW by 2031.
With regards to its hydrogen strategy, Bloom Energy continues to believe that their solid oxide technology can be used for 75% of green hydrogen use cases like ammonia, steel, and iron production. Bloom Energy recently announced its new agreement with LSB Industries for the installation of a 10 MW solid oxide hydrogen electrolyzer to generate green hydrogen for the production of ammonia. For the rest of 2022, we will likely see more demonstration agreements, while the larger scale orders of more than 100 MW are expected to come in towards the second half of next year.
Bloom Energy has been successful in expanding internationally with its partnership with SK ecoplant, capturing a significant portion of the stationary fuel cell market in South Korea. As part of its international expansion plans, the company will now be targeting Europe for geographical expansion. In the recent second quarter results, management also talked more about its recent 1-megawatt installation of Bloom Energy servers at the headquarters of Ferrari (RACE). As result of this installation, Ferrari is expected to reduce their requirements of gas by 20% while reducing emissions.
With this demonstration of the value add that Bloom Energy’s energy servers can bring, along with the increased need for energy resilience in Europe at this point in time, I am of the view that the expansion into Europe is actually very timely. I am certain that many European customers will find strong value add from Bloom Energy’s servers to complement with their own energy strategy as well as to reduce their carbon footprint.
Valuation
My one-year target price for Bloom energy is based on an assumed 19x 2024F EV/EBITDA multiple. This premium valuation multiple is justified in my view because of the company’s growth opportunity as it is near an inflection point in terms of growth opportunities in different markets as well as its huge backlog, and pivot towards profitability at an earlier stage relative to other hydrogen peers. As such, my 1-year target price is $32.60, implying 51% upside from current price levels.
Risks
Execution risks
Bloom Energy is going to be doing a lot in the next few years as it looks to expand into different markets and different geographies. Needless to say, this brings along risks where Bloom Energy is unable to gain the traction it needs in these new businesses and new geographies to succeed.
Political and regulatory risks
While the recent Inflation Reduction act is positive for Bloom Energy, the risk remains that the support from government policies could be withdrawn. Especially for Bloom Energy’s hydrogen efforts, if these hydrogen incentives are removed, this could definitely affect Bloom Energy’s progress in the space.
Supply chain challenges
As we have seen in Bloom Energy’s recent quarters, the only thing slowing the company down is the higher input costs as a result of inflation and supply chain challenges, as well as the disruption in supply chain leading to longer delivery times and lower availability of products. While this should only affect the company in the near-term, there is the risk that these supply chain challenges linger on for a longer period of time than expected.
Competitive pressures
As a result of expansion into different markets and geographies, Bloom Energy is now exposing itself to a wide array of competitors in different market segments. For example, in the fuel cell space, it is competing with peers like Plug Power (PLUG), amongst others. If competitors were to intensify competitive pressures, we could see a more difficult operating environment for Bloom Energy with lower growth and margins.
Conclusion
Bloom Energy is currently at an inflection point as favourable government policies, strong business momentum and multiple expansion opportunities means that the company could see huge growth in the near term. Bloom Energy continues to expand geographically into Europe and has also expanded into other market segments other than its initial energy server market. Furthermore, the company is growing capacity at a rapid pace and management continues to be confident in achieving its long-term financial targets. Lastly, the company is executing well amidst a very tough operating environment. My 1-year target price is $32.60, implying 51% upside from current price levels.
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