Bloom Energy (BE): Buy Rating For Hydrogen Platform Leader

Investment thesis

After researching and doing a deeper dive into Bloom Energy (BE), I am initiating Bloom Energy with a buy rating and a target price of $30.90, implying an upside potential of 85%. The reasons for these include:

1. Quality high growth profile in multiple segments from power generation, to carbon capture and hydrogen.
2. Strong value proposition to enterprise customers, including lower and more predictable costs, more resilient and reliable power and better ESG profile.
3. Bloom Energy’s customer profile is increasingly becoming more diversified and more international, while acquiring larger sites and expanding volumes from existing customers.
4. Rare profitability profile for a hydrogen related company due to improving cost dynamics and cost control initiatives.

Overview

Bloom Energy is a company focused on stationary base load power generation. Its energy platform is referred to as Bloom Energy Servers. The company was the first to create a commercially viable solid oxide fuel cell power generation platform at a large scale.

The Bloom Energy Servers are fuel flexible, meaning that they can create electricity from multiple sources: natural gas, biogas and hydrogen. In addition, its solid oxide fuel cell technology can be used to create hydrogen. As such, Bloom Energy has been in recent times seen as a play to gain exposure into the hydrogen theme, especially in the stationary power generation segment.

As a stationary power platform, it has customers that are amongst the largest utility companies and multi-national corporations in the US and in Korea (elaborated further below), that in my view, shows the strong value proposition of Bloom Energy’s power generation platform.

Industry

To illustrate how Bloom Energy views its target markets and total addressable market, the following shows a nice visual on the huge TAM that Bloom is able to tap on, which includes the US C&I market, the international market, other enabling technologies like Carbon Capture and biogas, and finally the hydrogen opportunity.

Based on Bloom Energy’s projections on its key TAM opportunities earlier in December of 2020, it expected to see a sales CAGR of 25% to 30% from 2020 to 2025, driven by its 3 key drivers of stationary power generation in US/Global, enabling technologies, and hydrogen fuel cells and electrolysers.

In my opinion, I think that this is achievable, given how its key markets seem to be growing over the next 5 to 10 years. The global distributed energy generation market is expected to grow by 14% over the next decade, while the global carbon capture market is expected to grow about 20% CAGR over the next 10 years. Similarly, the global hydrogen fuel cell market is expected to growth around 39% CAGR over the next 5 years, while the global electrolyser market are expected to grow 30% CAGR over the next 10 years.

To better understand Bloom Energy’s value proposition, we need to understand how its solid oxide fuel cell platform works.

First, the building blocks of the Bloom Energy Servers are individual solid oxide fuel cells. Being a fuel flexible platform, it is able to utilise natural gas, biogas or hydrogen which is passed over the anode while ambient air is passed over the cathode and through an electrochemical reaction, forms electricity.

Next, multiple solid oxide fuel cells are put together to form a stack and stacks are then placed into modules. Several modules form a Bloom Energy Server platform. I believe that this modularity enables high energy density and can be used to meet the varying individual needs of its enterprise customers.

Comparison of different fuel cell systems

As solid oxide fuel cell is one of several fuel cell systems available in the market, it is necessary to understand what are the use cases of solid oxide fuel cell and how does it compare to other fuel cells like Polymer Electrolyte Membrane (PEM) fuel cells and Alkaline fuel cells.

The diagram below from the Office of Energy Efficiency and Renewable Energy gives us a clear understanding of the advantages, challenges and applications for the different types of fuel cell types.

Although PEM fuel cells are expected to take up majority of market share by 2030, it is important to note that PEM and solid oxide fuel cells may co-exist to tackle different market segments. I believe that PEM fuel cells will be primarily used in transport applications, like in material handling, heavy duty trucks and even potentially airplanes. This is because their lower temperature required means that the systems can start more quickly. In contrast, I believe that solid oxide fuel cells will be primarily used for stationary power generation or utility applications. I think understanding the applications of both fuel cell systems will help better frame our understanding of Bloom Energy’s offerings, as well as its other competitors like Plug Power (PLUG).

Competitive advantage

Strong value added to enterprise customers

In my opinion, I see that Bloom Energy’s competitive advantage against competitors like traditional power generation companies are the immense value add they bring to the table for their enterprise customers, offering all that while at a lower cost.

First, Bloom Energy servers provide uninterruptible, reliable and resilient power, as compared to traditional grid power that experiences occasional power outages. Second, for the same amount of energy produced, Bloom Energy produces 50% less carbon dioxide than traditional power generation players. Lastly, on top of all these benefits of Bloom Energy’s platform, it provides a lower and more predictable cost for its customers compared to the traditional grid electricity bill. Thus, with the benefit of resiliency and better ESG scores as well as being cheaper and more predictably affordable than traditional grid generation, I believe that Bloom Energy will continue to see market share gains in the industry.

In terms of resiliency, Bloom Energy’s servers have protected customers from 1196 grid events since 2018 and I believe that for many enterprise customers, this is of upmost importance as they need to ensure the continuous running of business, especially for online run businesses. With extreme weather events causing longer and more frequent power outages, Bloom Energy’s resiliency is a need for successful enterprise customers wanting to be online 24/7.

Resilient and improving customer mix

Bloom Energy is seeing improving customer fundamentals that are increasingly becoming more resilient, in my view. As can be seen below, Bloom Energy is seeing a more diversified customer base as its top 3 customers makes up more than 63% of its total customer base, compared to less than half before its IPO. Also, Bloom Energy’s ability to land more larger US sites with more than 1MW is further testament to its ability to attract large MNCs and utility companies. Lastly, Bloom Energy is also able to expand and diversify globally, especially with its recent success in Korea.

As the United States is Bloom Energy’s largest market, its largest customers in the US include AT&T (NYSE:T), Google (GOOG, GOOGL), Walmart (NYSE:WMT), Digital Realty (NYSE:DLR), Equinix (NASDAQ:EQIX), and Home Depot (NYSE:HD). I believe that growing large customers is important, but growing from its existing customer base is also important as well. Bloom Energy has demonstrated ability to execute well in its land and expand model where 68% of its order volumes are coming from its current existing clients. This is testament to the quality of Bloom Energy’s platform and value proposition.

Its second largest market outside the US is Korea. Bloom Energy entered Korea in 2018 and currently has more than 200 MW of Bloom Energy Servers under contract. The South Korean government is supportive of a hydrogen strategy and even has a hydrogen roadmap that aims to have 6.2 million hydrogen cars and the construction of 1,200 filling stations by 2040. In 2020, Bloom Energy announced its strategy to enter the hydrogen market in Korea through the expansion of the SK Group partnership to commercialise fuel cells in South Korea. The existing partnership between Bloom Energy and SK Group has already resulted in 120 MW of fuel cells being sold in South Korea. What was more convincing for me is that SK Group explained that it forecasts to sell 400 MW of fuel cells per year by 2040, more than 3 times what has been sold thus far.

In addition, Bloom Energy also signed a joint development agreement with Samsung Heavy Industries to design and develop fuel cell powered ships. Samsung Head Industries plans to replace all existing main engines and generator engines with Bloom Energy’s solid oxide fuel cells. Once in commercial stage, Samsung Heavy Industries said that the market for Bloom Energy Servers on Samsung Heavy Industries ships could be 300 MW per year.

In my opinion, Bloom Energy’s execution in the US to grow its customer base and expand from existing customers, as well as new project wins and partnerships with international customers signal to me that Bloom Energy’s offerings are increasingly being recognised by local and international customers. With improving technology and cost reductions, Bloom Energy will continue to see a strong growth profile and market share gains as enterprise customers see the strong value add brought by Bloom Energy.

Financials

Bloom Energy projects gross margins to reach 30% in 2025, while operating margins are expected to reach 15% in 2025. I think that 30% gross margins is achievable by maintaining its investments in advanced manufacturing to sustain 40% gross margins on its products segment, while services segment should see profitability by 2023, with improvements in fleet optimisation, replacement costs and predictive analytics.

I think that 15% operating margins by 2025 is also achievable given an assumption of SG&A and R&D expenses to maintain at 7% and 8% of revenue respectively.

Peer Analysis

When talking about Bloom Energy, other companies that produce hydrogen fuel cells come into mind, like Plug Power and Ballard Power (BLDP), both of which focus on PEM fuel cell systems. With regards to Bloom Energy’s competition from other fuel cell types, the company says this of other commercially available fuel cell types as one of its main competition in its 2020 10K :

Our Energy Server uses advanced solid oxide fuel cell technology which produces electricity directly from oxidizing a fuel. The advantages of our technology include higher efficiency, long-term stability, elimination of the need for an external fuel reformer, ability to use biogas, natural gas, or hydrogen as a fuel, low emissions and relatively low cost. There are a variety of fuel cell technologies, characterized by their electrolyte material, including:

Proton exchange membrane fuel cells. PEM fuel cells typically are used in onboard transportation applications, such as powering forklifts, because of their compactness and ability for quick starts and stops. However, PEM technology requires an expensive platinum catalyst which is susceptible to poisoning by trace amounts of impurities in the fuel or exhaust products. These fuel cells require hydrogen as an input source of energy which adds to the cost, complexity and electrical inefficiency of the product. As a result, they are not an economically viable option for stationary base load power generation.

As a result, I am of the opinion that other types of fuel cell systems like PEM fuel cells, although are very suitable for transportation applications, are not suitable and viable for stationary base load power generation and thus are not a very real threat to Bloom Energy at present.

In addition, competition comes from traditional power generation systems. However, as mentioned earlier, Bloom Energy competes favourably by providing more benefits at a lower and more predictable cost.

Lastly, another source of competition comes from solar and wind renewable energy companies. With solar energy, Bloom Energy servers are able to provide stable power generation while at high power density requiring 1/125th the footprint of an equivalent solar farm. For wind power, similar to solar, Bloom Energy servers are able to provide stable power generation and more importantly, be located near customer locations rather than in remote wind farms.

Valuation

Bloom Energy is currently trading at a 20% premium to its NTM EV/EBITDA multiple when it listed.

I assume a multiple of 28x FY2023F EV/EBITDA (in my view a rather conservative number), and with that derived a target price of $30.90, implying an upside potential of 85%. In my opinion, the 29x EV/EBITDA multiple is justified given that Bloom Energy’s growth profile, shift towards profitability and strong product interest, backlog and customer list.

Risks

Execution risks

The company has much going on in the next 2 to 3 years that are in the ramp up phase and to commercialise its hydrogen fuel cell and electrolyser business, along with its international strategy.

Government policy

Government policy could be supportive of hydrogen efforts. However, the lack of or removal of these hydrogen incentives could be negatively affecting Bloom Energy’s plans and profitability.

Competition

Competition could worsen in the next few years, particularly from both fuel cell companies and traditional generation companies, which may result in alternatives to Bloom Energy’s products.

Conclusion

All in all, I believe that Bloom Energy has a very strong value proposition to enterprise customers given its benefits while at a lower cost. It also has several high growth path in enabling technologies and hydrogen, outside of its main platform business to drive further upside in the long run as these businesses ramp up. Based on an assumption of 29x FY2023F EV/EBITDA, which in my view is conservative given my understanding of the fundamentals of the company, my target price for Bloom Energy is $30.90. This implies an upside potential of 85%.