Reflections on A CleanTech Trio: ORGN, RMO, SOL
Its been a tumultuous past few months against the backdrop of the eruption of the Omicron variant and the geopolitical brinksmanship that has dominated the Western media cycle. As such, the proceedings of the November ’21 COP26— the 26th United Nations Climate Change Conference — feel like they occurred a lifetime ago. For those of us who are keen watchers of capital markets and macro-trends in strategic investment, a number of themes and action items were discussed in Glasgow that I intend on returning to at multiple junctures moving forward.
Today I want to start with the basics, and combine some of my thoughts on the trajectory of the cleantech revolution with some more traditional analysis for three stocks I’m monitoring for a future entry point in order to establish a long position. So let’s get to it, what exactly is the whole buzz around cleantech?
In his remarks at the COP26, US President Biden remarked:
“…Our overriding purpose here in Glasgow is to raise the ambitions of our commitments to keep within reach our goal of limiting global warming to 1.5 degrees Celsius. But setting ambitious targets is only half of the equation…We also have to… have concrete plans for how we’re going to meet…those goals and decarbonize our economies to reach net-zero emissions by 2050…[T]o state the obvious, we have to immediately scale up clean technologies that are already commercially available and cost-competitive, like wind and solar energy.”
And there you have it. In fact, incentivizing investment, R&D, and public-sector support for cleantech innovation was one of the key action-items to emerge from COP26. In parallel, the megatrend of ESG analysis is making a mega-splash in the global discourse in forums ranging from the building inspections in Manhattan to carbon footprint reporting for Fortune 500 companies. I for one see immense potential in the cleantech space, and am confident that it will be one of the more dynamic sectors in the global economy over coming decades. Here’s an initial foray into the sector and some thoughts on a few companies I’ve been eyeing.
The cleantech sector consists of stocks and funds that specialize in environmentally friendly companies. Many of these companies cover areas such as energy, water and air cycles, waste treatment, transport, reduction of resource consumption, etc. The main goal of these companies is to provide the necessities needed to survive, prosper and reduce ecosystem damage, all while receiving incentive from the public and private sectors. As seen in the table below, the cleantech sector is growing exponentially. The understanding of the climate crisis, shortage in supply chains, political action, and COVID-19, have made the cleantech market an opportunity to invest in.
Furthermore, there are some competing trends gaining traction within the sector that make it a strong market to invest in. Firstly, China, the EU, and the United States all have pledged to be carbon free by 2060. We can also see that over 200 companies within the private sector which account for 23% of carbon emissions, have also pledged to commit net-zero carbon emission by 20402. By securing funds to companies that provide eco-friendly solutions we can clearly see a projected growth rate of at least 4x in the future. These factors combine in pointing to the fact that now is an opportune time for early-comers to invest in cleantech in order to maximize LT gains.
Another trend at work is that the price for renewable energy has been decreasing exponentially year over year. As seen in the graph there has been a dramatic decrease in cost for solar energy while fossil fuel and coal remain unchanged due to the relatively fixed extraction/transportation costs and extensive global infrastructure already in place for the hydrocarbon-based energy economy. While placing renewable energy more squarely within the purchasing power of consumers, this drop in price has had the obvious, inverse effect on industry players — most of whom are less established and hold far less cash reserves than hydrocarbon market veterans. In coming years, I hope to see a an emerging economy of scale for the renewable sector that will incentivize rather than lament lower energy prices for regular consumers, as cleantech begins to overtake and replace dirtyTech.
Now lets change gears and take a look at some of the companies I’m in the process of screening for my ’22 cleantech portfolio. Since November, all three have eaten it (excuse my French), but I’m seeing this is a nice opportunity for a low entry and then a long ride up.
Origin Material, Inc. (NASDAQ: ORGN)
Current Price: $6.41
Market Cap: $905.5 million
My first company that I believe to be a promising investment for the future is Origin Material. Recently acquired via SPAC, Origin Materials is a carbon negative company that replaces petroleum-based materials with decarbonized materials. Their patented technology is revolutionizing products such as clothing, textiles, plastics, packaging, etc. With the new SPAC deal in place Origin Material increased customer demand from 1 billion to 1.4 billion this past year. With their Origin 1 plant expected to be completed six months earlier than expected and within the year 2022, Origin Material can begin delivering on their promise and begin earning revenue as seen with a strong projected EBITDA growing year over year4. In addition, I used a market comparison valuation since Origin Material is a growth company with zero profit and compared with Exxon Mobil (XOM).I believe that Origin Material once up and running, can cut into Exxon’s 241 billion dollars in revenue5. Exxon currently has an EV/Revenue of 1.2x and I think Origin Material’s having cheaper cost overall will make for higher EV/Revenue in the future.
Romeo Power, Inc. (NYSE: RMO)
Rating: Buy (Short Term)
Current Price: $3.23
Market Cap: $433.27 million
Romeo Power offers custom electrification solutions for the commercial vehicle industry spanning from delivery vehicles to the largest, long-haul vehicles., Romeo Power’s modular battery systems have multiple safety features and are designed to tolerate thermal event faults at a single cell level.
Since Romeo’s IPO in 2019 the stock has fallen 67% and when looking at gross profit Romeo has a loss of (18 million). However, Romeo does have current agreements with Lion Electric which will produce up to 234 million in revenue over a 5 year span.7 They also secured a deal to provide Paccar with batteries for their EV trucks through 2025. Nevertheless, I do think that Romeo Power is competing in one of the hardest industries at the moment. Even with new bills passed in California forcing all vehicles to be zero-emission by 2035, or the CAGR of 28.1% through 2028, I think the competition is overall too big for Romeo to prosper long term.
However, with current deals in place I do believe the company’s financials should experience a strong increase over the next 5 years making it a viable short-to-intermediate term investment.
Renesola (NYSE: SOL)
Current Price: $6.37
Market Cap: $444.30 million
ReneSola focuses on development, construction management and financing for solar projects around the world. It serves clients across the U.S. and Europe, including New York, Minnesota, Poland and Hungary. What I like about Renesola is its EPS. Since Q4 2020, ReneSola has provided positive EPS. Furthermore they’ve beaten projections for the ¾ previous quarters. This all occurred during the covid-19 pandemic when there were business shutdowns and lockdowns worldwide. Secondly, solar panel prices per megawatt have decreased year over year which should provide lower operating expenses over time. Lastly after calculating the revenue growth I expect a 64% CAGR of revenue for the next 3 years. With increase in revenues, projected EPS, and lower operating expenses, I believe that Renesola target price should be $10.00 per share within the next 3 years.
After reviewing this trip of cleantech players and projecting future growth for each, I believe the most profitable and at the same time safest bet is Renesola. They’re the only company that has positive net income, and a strong PE of 38. I think the second stock I’d invest in is Origin Material for their potential. I wouldn’t put too much money and make it more than 5% of my portfolio. However, I do believe that with billions of dollars in contracts, operations almost up and running, and already development for future operations, I believe that Origin Materials has strong management and could see and should prosper once up and running. Lastly, I would buy for the short term Romero Powers. The company has net loss in financial but recently acquired deals to provide batteries to PACAAR and the stock price falling 67%, I do believe that there should be some short-term success with the EV market growing at an exponential rate.
Its been fun, but that's enough cleantech for one morning. Stay classy, stay healthy, and tune in for next time.