1 Battery Stock That Deserves a Closer Look

If you're looking for a unique way to get into the battery storage market, Stem (STEM -2.52%) deserves your attention. The company's systems work with both renewables and fossil fuels, and it's ahead of even Tesla (TSLA -1.92%) in this emerging market.

In this segment of "The 5," recorded on Nov. 23, Fool.com contributors Connor Allen and Jason Hall discuss the strengths of Stem and the growth potential in battery storage. 

Connor Allen: Jason, I'm actually picking a stock that I know you know a good bit about and that's Stem Energy. Stem Energy specializes in battery storage. Basically, the way the business works is they sell around a million-dollar battery storage system paired with Athena Software, which works as a SaaS model for the company. The customers-- say it's a business owner and he owns manufacturing plant. The guy who owns the plant, he goes to Stem and he says, "Hey, I want to make my energy as efficient as possible." Stem goes, "Well, here's this battery. It's a million dollars and here's how much we're going to save you." They have tons of these different case studies on their website about how much different business owners are saving and it's pretty incredible. What Athena Software can help Stem do is it can help collect energy at low costs and can help not collect it when the prices are high. Energy prices fluctuate a lot throughout the day, so you want them to collect it, say, at night. That's when energy prices are the lowest. It will be collecting it right then, it also distributes the energy to the manufacturing plant as efficiently as possible. Yes, it's quite the upfront cost for a business owner, but it's saving them tons of money years down the road. One interesting thing about that for me is I thought it was just paired with renewable energy at first when I just learned about Stem and that's not true.

Jason Hall: I love this part.

Connor Allen: It can take energy not only from renewable. It's not like the battery is just paired with a solar panel.

Jason Hall: It doesn't matter where they come from.

Connor Allen: It can come from nuclear, it can come from fossil fuels, it can come from renewables. If you're looking for a company that isn't reliant on, say you think nuclear energy is the future of the world. Well, that doesn't mean anything to Stem because they can still collect energy from nuclear, whether it's renewables or whether it's nuclear. A little bit about their financials. I know we're running a little bit behind, but the revenue growth has gone from $4 million to $40 million in 15 months. That's nothing to bat an eye on at. It's growing fast and it's solving a lot of problems for a ton people. That's Stem.

Jason Hall: It's cool. I'm going to just elaborate a little bit more, and I want to kick it, because I wanted to buy the stock tomorrow, but I'm not going to able to now, and that's OK, I'll just buy it next week. Batteries for them are just the thing. They are agnostic about the batteries. They want their customers to think of them as just a commodity too. Adam, it's Stem, ticker STEM. Where they make money is entirely -- not entirely because they will make gross margin on the batteries. But really, it's about Athena, it's about the software. Their goal is 70-80 percent gross margins like Microsoft (MSFT -1.27%)level margins on this. It's a recurring revenue, it's a SaaS model. They have 100 percent attachment. You buy battery from them, you get Athena as well. Forty utility companies use it. Grid operators use it. It's really valuable, it's really important. Connor, here's the big number. Over the next 40 years, the next four decades, about $1.2 trillion is going to be invested in this thing that they do. They are a big first-mover. They have a great product. They have some really strong intellectual property. Whether you're a utility, you're a power buyer, you're a power seller, whoever you are in that value chain, Stem is really well-positioned. Taylor, do you have a question?

Taylor Carmichael: I do. I was just wondering, who are their competitors?

Jason Hall: Tesla is probably the biggest. All of the battery manufacturers to some or lesser extent do this. But they actually have the most deployments. They are the largest number of deployments in this space. Second is Tesla, and Tesla has software. Here's the difference. Tesla doesn't talk much about their software. They don't disclose it in their filings -- the specifics or the financial results. But Stem's actually bigger in this business still even than Tesla is. But that's a big competitor. But that should tell you how good these guys are if they're doing better at it than Tesla, who we consider the big player in that space. Really good question.