In this clip from "The High Energy Show" on Motley Fool Live, recorded on Feb. 8, Motley Fool contributor Jason Hall discusses why Stem (STEM -4.12%) should be on the radar of investors and how its stock could see strong long-term growth.
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Jason Hall: This is a deal that was first announced back in December but it finally closed. I think the afternoon of the last time we did this show so it's been official since then. This is Stem Inc. This is the AI software, cloud software, software-as-a-service company that does energy storage. They sell batteries, but their Athena AI software is the key. They made an acquisition of a company called AlsoEnergy. It's a privately held company that I think is a great fit. It's a really good fit with what they're doing. AlsoEnergy manages distributed solar and some utility scale solar with their software offering. By combining that with Stem's Athena, they're solving two different problems in the value chain that have overlapped but are not competing with one another. They share about 30% of their customer base, but they do different things for them. It creates this really unique opportunity to cross-sell with now their combined customers to both products. Again, they combine this business of doing two different things that have a lot in common. I think something that also, maybe investors that follow this haven't paid close enough attention to, is how profitable AlsoEnergy is. This is a business that's accretive pretty much immediately right to Stem's cash flows and its EBITDA.
Travis Hoium: Look at those gross margins difference.
Hoium: From the two companies.
Hall: It's fantastic.
Zane Fracek: I think that's a bit of a bellwether.
Hall: Go ahead, Zane.
Fracek: I was just going to say I think that's a bit of a bellwether for where Stem's going to go because AlsoEnergy's in the energy software space as well.
Hall: Right. That's exactly the key. At the end of the day, both of these businesses are targeting for their recurring software. They're looking at 80% gross margins for the software itself. At scale, because you're adding the first 10 customers covers the cost of the infrastructure, the 11th customer is like 95% incremental margin. At scale, this could be a cash cow business. I'm really impressed with this.