A Few Cleantech Stocks With ‘Moonshot’ Potential
Led by Tesla, Cleantech companies entered the mainstream investor conversation in 2019 and 2020. Starting with the post-pandemic rebound through the early part of this year, the overall performance of stocks in this sector surpassed even the impressive gains of the S&P 500:
The outperformance can be chalked up to the successful advancement of certain technologies (i.e., lithium-ion batteries) and business models, and also to a lot of hype tied to the promise of massive stimulus (for the economy in general and Cleantech industries in particular) from the Democrats who took both branches of Congress and the White House in 2020.
Given the performance before and after January 2021, some might even call it a bubble that popped.
Tesla led the charge and is now the giant of the sector. If you feel like you missed that boat but are still bullish on Cleantech and on the lookout for high risk/high reward opportunities, here is a quick introduction to a few stocks with ‘moonshot’ potential.
With such highly speculative stocks, the warning which can’t be over-emphasized is: do not be surprised if you lose your entire investment.
Eguana Technologies (EGT:CN)
Market Cap: CAD $107 million
Average Daily Volume: 145,565 shares
Can Trade Options? No
Eguana sells its own branded range of battery systems (B-2-C) and also supplies other installers (B-2-B) that use Eguana’s products in their own energy storage offerings. The batteries are suited for residential and small commercial markets. Revenue more than doubled in 2020 over the prior year and is up over 11x since 2016. The fast growth is due at least in part to partnerships with established firms like the Japanese conglomerate ITOCHU and startups like Freyr (Norway) and 24M (USA). These two startups are seeking to build battery giga-factories in Europe and India, respectively, which is a great sign for continued J-shaped growth for Eguana.
Residential Energy Storage Market Share and Pricing
Source: EnergySage Solar Marketplace Intel Report, Aug 2021
The residential energy marketplace firm EnergySage published a report based on quoted prices on its platform. Eguana appears to have competitive pricing and is gaining a foothold in terms of market share.
Another residential battery storage company called SimpliPhi Power was just acquired by an engine manufacturer, one of a few recent M&A deals involving energy storage companies. If these deals are a sign of increasing M&A activity in the sector, owning small potential targets like Eguana can be a good strategy.
On the flip side, Eguana is burning cash (CAD $12 million burned through nine months of fiscal 2021). The company raised $21 million of equity earlier this year but will undoubtedly need to raise more. They already have a fair amount of debt on the books, and the latest quarterly report notes “significant doubt on the Company’s ability to continue as a going concern”. In other words, not an atypical story for an early-stage company with plenty of growth and plenty of risk.
Neovolta (NEOV: OTC)
Market cap: $87.8 million
Average Daily Volume: 19,314 shares
Can Trade Options? No
The EnergySage chart above shows another tiny publicly traded residential battery storage company, Neovolta. For the sake of brevity we won’t dive into company details but it likely has a similar outlook and risk profile to Eguana. An additional risk is that Neovolta’s stock is extremely thinly traded.
Innovatec (INC:IM)
Market cap: EUR 71 million
Average Daily Volume: 795,000 shares
Can Trade Options? No
Innovatec is an Italian company that focuses on the “circular economy”. It provides energy efficiency improvements for businesses and homes, constructs renewable energy projects and waste disposal plants, and provides waste management services.
Perhaps remarkably for a company trading at such a low market cap, Innovatec is in a strong financial position. The company is profitable, EBITDA has been positive since 2018, free cash flow has been positive since at least 2016, the liquidity position is comfortable, and the debt burden is low.
Revenues fell noticeably in 2020 due to the pandemic, which is entirely reasonable given it is hard to forget the calamitous impact that the early spread of COVID had on Italy during the spring of last year. But when most people must have been gripped with fear, it appears that Innovatec’s management was able to make a strong move for the business by acquiring a company that added the B-2-C component of the energy efficiency business in the second half of 2020. This has paid off so far in 2021 as the company’s results are showing a strong rebound.
Progressive policies in Europe are also a tailwind: The Superbonus program in Italy is a 110% tax break for energy improvements such as building insulation and solar systems; the European Union has set ambitious long-term goals under the Circular Economy Action Plan for reducing and recycling waste; and Italy’s National Integrated Energy and Climate Plan (PNIEC) targets the share of renewables to hit 55% of power generation and a solar capacity of 52 GW, up from a current level of 22 GW, by 2030.
Also, many people are currently optimistic on the stability and credibility of the Italian government under the leadership of Prime Minister Mario Draghi. He was formerly the President of the European Central Bank.
Innovatec’s risk profile appears to be much less than for other micro-caps. To be fair, the “circular economy”, energy efficiency, and waste management probably do not get investors’ blood racing. The macro environment is hopefully setting up these business lines for solid growth, but we would not count on a J-curve from here.
MP Materials (NYSE:MP)
Market cap: $6.2 billion
Average Daily Volume: 2.7 million shares
Can Trade Options? Yes
MP owns the only mine in the U.S. which produces rare earth minerals. Rare earths have been in the news because they are critical for many tech products but a vast majority of global production happens in China. The mine is called Mountain Pass and, for those familiar with the drive between LA and Vegas, is located right off the freeway near the Nevada border, not far from the (much more visible) concentrated solar power project. The mine is a huge hole in the ground so is not visible from the freeway. Anyway, MP has been mining the rare earth element neodymium from this site since 2019. There is no domestic processing industry though, so the company has been shipping the ore to China.
The Chinese company that is buying and processing the ore also owns a minority stake in MP. What is quite interesting is that this Chinese company is an SOE (state-owned entity). You read that right: The only rare earth mine in the U.S., an extremely strategic asset, is partly owned by the Chinese government! It sounds like an arrangement that cannot possibly last long.
In addition to mining the ore, MP is also developing the ability to process the ore at the site itself. The macro trend toward “re-shoring”, to shorten supply chains and lessen reliance on China, is a long-term tailwind for a local supplier of a critical raw material like MP.
With a market cap of over $6 billion, MP is already a mid-cap stock but the growth potential and risk makes it feel more like the micro-caps mentioned above. The operational risk is very high – it is a startup operation with no successful precedent in the U.S. and the cost of production at scale has to be competitive for a global commodity whose price is driven by Chinese producers. On top of that, expanding into ore processing makes strategic long-term sense for MP but is second unproven venture on top of the first.
Disclosure: 118 West Capital has no position in any of the aforementioned stocks as of the date of this blog post.
Sources
MP Materials SEC filings
EnergySage Solar Marketplace Intel Report
https://www.ecovis.com/global/superbonus-110-percent-an-interesting-opportunity/
https://www.frontiersin.org/articles/10.3389/frsc.2020.00008/full
https://www.energy-storage.news/simpliphi-power-acquired-by-power-equipment-manufacturer-briggs-stratton/