What’s Hodge’s “Amazon of Energy” pitch about?

Teaser for Nick Hodge's Foundational Profits says, "Every dollar of the $110 trillion “New Energy” revolution will flow through this one website... And you can buy the company behind it for 1/100th the price of Amazon!" So... what is it? We've got answers

By Travis Johnson, Stock Gumshoe, April 22, 2021

This latest teaser pitch from Nick Hodge for his Foundational Profits newsletter has gotten a lot of raised eyebrows and questions from the Gumshoe faithful — whatever is this “Amazon of Energy” idea, and is it real?

As always, the answer is, “kinda” — so let’s look through the ad (they’re currently selling Foundational Profits, Hodge’s “entry level” newsletter, for $99). The marketing campaign for this started over the course of a few days, including free lead-in articles here and here, but this is the basic promise:

“All power is about to go online… becoming far cheaper, cleaner, more reliable… And available to buy and sell immediately like a stock or crypto.

“That’s what MEMS achieves.

“It transforms what energy actually is, which means…

“No more waiting and paying at the pump.

“And no more bills from the power companies.

“Energy becomes a tradable good like any other.

“You can carry energy on your phone. Like downloading a song. Or uploading a video to YouTube.

“Or, more precisely, like buying and selling a product on Amazon.”

OK, I guess that makes some logical sense — just don’t take it too far. Energy is its own thing, it doesn’t actually get carried on your phone or get sent from your account to someone else, that energy has to travel on power lines or be stored in batteries and both of those things cause energy loss… but it is becoming easier in many ways to trade energy, utilities do this all the time and it is now, to some extent, more viable for individuals, too.

So maybe your solar panels generate more power than you need, and your electricity flows back into the grid… but to some degree electricity is fungible, so you can sell that electricity to some other buyer. In reality, you’re selling it into your energy grid, and your utility is selling it to someone else connected to that grid, but since the electricity you generate is the same as the electricity someone across the world needs, perhaps someday we’ll get to the point where it’s all fungible and trading on one central exchange — the electrical current that you’ve generated won’t itself move across the globe, but the right to have a certain amount of electricity could become a more standardized and tradable asset eventually. That’s a little utopian (or dystopian, depending on your perspective), but that’s generally the direction we’re moving, even if the local importance of generation, the immediate need to balance the grid wherever you are, and the cost of storage or transmission are always going to make trading electricity more complex than trading stocks, beanie babies or NFTs.

Hodge exaggerates in the ad, implying that he can sell his electricity to someone in need in Africa… there is, of course, no direct connection between his power grid in the US and the power grid in Zimbabwe or wherever else, so he can’t directly provide that electricity if they’re having a blackout across the world… but it gets the idea across. Just don’t take it too literally.

And the way I see it, using MEMS (micro-electromechanical systems) in this context is just a way to insert a mysterious buzzword — MEMS have little to nothing to do with energy trading (though these distributed sensors and machines can certainly make panels or electric grids more efficient — and yes, “smart energy” systems, including sometimes devices that could probably be considered MEMS, are part of balancing the grid, including managing the shift of outflow to inflow for home solar/battery systems).

The basic theme of the ad is that this “Amazon of Energy” is being created because of the rise of “Virtual Power Plants” — the growing ability, essentially, to treat networked solar panels and battery storage (like the panels and batteries installed across thousands of homes in a particular area) essentially the same as traditional power plants are treated. Here’s some more from the pitch:

“Back in September, the Federal Energy Regulatory Commission (FERC) issued Order No. 2222 — a change which removes regulatory barriers to virtual power plants by requiring grid operators to accept power from them — and to pay them at the same rate as traditional power plants.

“The order, which grid operators must implement by September of this year, has been compared by energy economists to the 1993 computer networking regulatory changes that allowed private companies to use the previously-public-sector-only NSFNet telecommunications infrastructure, creating the modern commercial internet.

“In the aftermath of those 1993 NSF changes, several entrepreneurs launched startups with the then-experimental idea of selling goods and services on the newly-opened network.

“Today, we call a few of those startups Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), and Netflix (NASDAQ: NFLX).

“Just like back then, one company is set to dominate this new virtual power plant space.

“I’m calling it the “Amazon of Energy”. And I think the gains could be similar.”

OK, so somebody is “set to dominate” virtual power plants — who is it? We do start to get some clues as the ad progresses, like this…

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“Every dollar of the $110 trillion ‘New Energy’ revolution will flow through this one website…

“And you can buy the company behind it for 1/100th the price of Amazon!”

Which is crazy, of course, there is almost never “one website” or “one company” that controls everything. Sure, Google dominates search and has something like 90% market share globally according to some folks (other guesses put it at 60%, which seems very low), but it was only about 30% when they came public (they had just taken the lead from Yahoo and MSN when they had their IPO in 2003, the three were still about the same size in terms of traffic). Even Amazon.com’s share of US ecommerce is only about 50% now, and it was down in the 30% range five years ago.

Yes, maybe this “virtual power plant” technology will become huge… but that doesn’t mean it’s easy to predict who will “win” — and even if we’ve got an early leader now, we should probably reflect on how challenging it was to be certain about whether Yahoo, Microsoft or Google was going to be the leader back in 2002 and 2003… and the real pioneers, Netscape and AltaVista and AOL, had already been lapped. Maybe this point in time is not 2005, when Google is clearly about to dominate for a generation… maybe it’s 1999, and Netscape is obviously going to rule the world.

These kinds of metaphors, like the idea of becoming the “Amazon of Energy,” make it easy to focus on the winners, pretend that they were obvious and winning choices way back at the beginning, and forget the many losers who laid the groundwork for creating gigantic winners like Amazon or Google but did not, themselves, do investors many favors along the way.

Sorry… I’ll get off the soapbox for a moment — we did want to find out what this company is, right? Any more clues?

We’re told that this company is the…

“Undisputed juggernaut of solar panels and battery storage….

“over half a million subscribers already….

“signing agreements with some of the largest utilities in the country….

“installing a new system nearly every two minutes….”

And the drool-inducing comparison to everyone’s favorite “green” stock…

“makes a third as much profit as tesla, trades at 1/60th the price….

“to be valued like tesla, it would have to surge 17X higher….”

OK, so that gives us some sense of the size — I don’t know whether he’s referring to the share price or the market cap, but that probably means it has to be either a stock trading in the sub-$100 range, or one with a market cap below $15 billion. The latter makes more sense, since share price is a pretty meaningless number, but we can’t be sure they’re making sense.

Other clues?

“… this company is positioning itself to dominate the entire grid.

“It’s connecting home batteries to make virtual power plants in New York, California, and Oregon.

“And it wants to do this for every home, everywhere it installs and operates batteries.

“It’s all run on AI software, tracking energy fluctuations in real-time, ensuring no loss of power. “

OK, so it’s probably involved in selling or installing home power systems, since solar panels and home batteries are often sold together. What else?

We’re told that this company doubled its market share with a merger in 2020, and…

“Thanks to this recent move…

“This is America’s undisputed juggernaut of solar panels and battery storage. It’s already signing agreements with some of the largest utilities in the country.

“It has over half a million customers already and is installing a new system nearly every two minutes….

“It already manages 400,000 home batteries, generating 2 gigawatts of power.”

And finally, Hodge tells us that this big news last year helped the share price to surge, going up about 300% from July to October… and he also provides a chart to show this jump in the share price, so thanks to the fact that stock charts are almost as unique as fingerprints or snowflakes, the Thinkolator can chew on the possible matches… and we get confirmation that this is Sunrun (RUN), the once-disappointing IPO that floundered from 2015-2018 but has found a new lease on life with the resurgence of solar power investment in the past couple years and, most recently, with the acquisition of Vivint Solar last Fall.

And, frankly, my first impression is that this idea is a lot less crazy than many of the small-cap daydreams and junior mining craziness that Nick Hodge more typically chats up. Sunrun appears to have been in the right place at the right time to take meaningful market share in the home solar installation/leasing market, as several predecessors ran into trouble for various reasons, and if the political priorities continue to drift greenward, with further incentives for solar panel and home battery installation either on the federal level or in more states, well, the market could certainly grow meaningfully larger over the next few years.

If you’re looking for a profit opportunity, though, it’s really a little more prosaic than this “virtual power plant” revolution — yes, it might be that as more home battery storage is added we end up with those batteries being much more important to the grid, or even driving some incremental revenue for the manager of that Virtual Power Plant (Sunrun, in this case, though they certainly don’t own the idea), but the real driver is just “how many new customers can Sunrun sign up to install solar panels and batteries?”

And the Vivint deal is a good one on that front, since it pretty dramatically extends Sunrun’s footprint. It’s a complex business, and depends on some variables outside of Sunrun’s control, like the level of government incentives or subsidies and the cost of solar panels themselves (which has become an issue with simmering trade battles between the US and China), but the basic economics work pretty reasonably — Sunrun helped to pioneer the installation of solar panels without big up-front payments, so they take a small down payment for installation but essentially lease the panels to the homeowner through a power purchase agreement… you continue to buy electricity, it’s just that your rate is known and you’re paying Sunrun instead of your utility.

So the finances are fairly easy to understand on a basic level — you have the cost to acquire a customer, which is made up of the actual installation cost (which varies, of course, but has generally come down over time) as well as the marketing and sales effort to bring that customer on board… and you have the lifetime value of that customer contract, which is a combination of the money that customer will pay over the life of the deal for electricity, any fees they pay, and the tax benefits or government rebates. Right now, Sunrun says that their subscribers in the fourth quarter were coming in at a Net Subscriber Value of $9,051 (using a 5% discount rate on future revenues).

According to their investor presentation, that means they have $7.8 billion in future cash flows, and that their own calculation fo the present value of those customers, minus debt, is $4.2 billion. That means they obviously have to keep growing and acquiring new customers to make this a rational business, because the company is currently valued at $11 billion… but the odds are that growth is a pretty good bet from here, since they’re now the largest seller and installer of home solar energy systems in the country at a time when demand is likely to be growing pretty fast.

No guarantees, of course, and the value of the company can certainly be debated when it comes to numbers — if you think of Sunrun like a subscription company, which they would happily endorse, then their annualized recurring revenue from current subscribers, as of December, stood at $668 million, and there’s a lot of predictability to that, with an average remaining contract life of 17 years.

So what do you pay for that? If you’re a cloud software company, maybe that kind of annual revenue would be valued at 20X sales, or even 30X or 40X for the more popular ones. That comparison makes Sunrun look kind of expensive, since their profit margins are nowhere near as good as a software company, so it’s tough to argue that the current valuation of 15X ARR is justifiable here… but they are certainly growing, with 20-25% growth in solar power installations expected this year, and there’s something to be said for the value of 17-year contracts versus the customer churn that the sexier cloud software companies sometimes face year to year.

I wouldn’t buy Sunrun based on the notion of “Virtual Power Plants” being something that they own the edge on in the future, there are dozens of companies building and talking about virtual power plants, many of which are far larger than Sunrun… but they are making progress in turning those solar panel and Brightbox (battery) installations into something real… and their large installed base does give them the chance at an advantage in helping to shape those utility relationships and pilot different projects (SolarEdge, sonnen, Tesla, Sunpower and others might disagree). They have indeed signed “virtual power plant” agreements with utilities in California and New York — and while these are very small and I’d argue they’re more like pilot projects, they might turn into something more meaningful in the future.

I might buy them, however, as the leading US installer of solar panels, particularly with the well-timed acquisition of Vivint, as a bet on the growing importance of solar power to the US grid and the likelihood that government incentives and mandates over the next couple years will further accelerate an already fast-growing business. They’ve generally been getting a run of analyst upgrades over the past month or so, largely because the stock price came back down to a somewhat rational neighborhood after going bonkers over the winter… here’s one excerpt of an analyst note from Piper Sandler last week that I picked up from Briefing.com:

“Sunrun: Piper Sandler upgrades RUN to Overweight given recent weakness coupled with a strong growth story associated with residential solar (47.20)
Piper’s Kashy Harrison added, ‘Since the middle of February, solar stocks have come under significant duress due to a combination of rising interest rates, regulatory uncertainty associated with net energy metering in CA, a lack of imminent catalysts, and a remarkable 2020 run. The recent move lower in the equities, however, is somewhat of a head-scratcher. 10 year US Treasury yields have recently moved lower (not higher), the market has line of sight toward longterm federal policy support via the “America Jobs Plan,” recent transactions highlight the group’s advantaged cost of capital even within a rising interest rate environment, and CA utilities are unlikely to win the NEM battle. Given recent share price weakness (down 51% vs. the recent peak) coupled with a strong growth story associated with residential solar (20-25% MW in ’21; 15% MW medium-term) and a management team with a history of value creation, we upgrade RUN to Overweight from Neutral.'”

I haven’t owned any of the solar stocks in years, but this one makes some sense to me… it’s not cheap, but the growth is strong and should accelerate a bit this year, and the visibility for future revenues is pretty solid and inflation-protected (even if, yes, it is somewhat susceptible to shifting political winds). Not a terrible idea… maybe some skeletons are lurking in their closet, I haven’t looked very closely for them yet, but once the recent bubble-like price surge gets digested there’s a pretty good chance that investors will look at the expected 50% revenue growth this year (and 20%+ growth after that) with a bit more enthusiasm, particularly as investors (and politicians) continue to focus on renewable energy and ESG priorities.

Sunrun is not going to be the “Amazon of Energy,” at least not anytime soon, and they’re not profitable yet… but they have strong market share in solar installations in the US and are a pioneer in “solar as a service,” and the cash flow will start to look quite a bit better as the base grows over the next few years. Sound like your kind of investment? See some red flags we should consider? Let us know with a comment below… and thanks for reading!

Disclosure: Of the companies mentioned above, I own shares of Amazon and Alphabet. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.

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