On Thursday, Piper Sandler adjusted its financial outlook for Stem Inc. (NYSE:NYSE:STEM) shares, a smart energy storage company, by reducing its price target to $2.00 from the previous $3.00, while maintaining a Neutral rating.
The firm's analysis points to a focus on the software/services segment, which is expected to generate approximately $98 million, marking a 56% year-over-year increase. This segment is particularly significant due to its contribution to the company's margins and EBITDA.
The firm's stance is cautious regarding the immediate financial impact of Stem's strategic shift towards targeting customers with shorter conversion cycles. Stem concluded the year 2023 with around $49 million in services performance obligations, which is a key indicator of revenues for the upcoming twelve months based on the past two years' pattern.
This suggests that Stem needs to either transform its committed annual recurring revenue (CARR) into actual recurring revenue (ARR) through binding purchase orders or secure a substantial volume of short-cycle projects.
Piper Sandler's expectations for the software/services revenue stand at $70 million, which is conservative compared to the $89 million consensus among other analysts and Stem's own projection of $98 million.
Consequently, the firm anticipates that Stem will achieve the lower end of the projected 15-20% margin range for the entire year, although margins in the first quarter are expected to exceed 20% due to the mix of hardware and software sales.
Furthermore, the firm has adjusted its EBITDA forecast for Stem to breakeven, which is below the median expectation of approximately $7 million held by other analysts. Despite the lowered financial estimates, Piper Sandler predicts that Stem will report favorable demand and reaffirm its target of $1.5-2.0 billion in bookings. The revised price target reflects the updated estimates and the cautious outlook on the company's near-term financial performance.
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