How are energy investors positioned?
On Wednesday, TD Cowen analysts, led by Thomas Boyes, downgraded ESS Inc. (NYSE:GWH) stock from Buy to Hold and significantly reduced the price target from $10.00 to $3.00. The stock, currently trading at $2.73 with a market cap of $32 million, has declined 73% over the past year. The downgrade was prompted by several factors, including a strategic shift in the company, an ongoing CEO search, concerns about funding, and the use of "going concern" language in its communications. Additionally, the analysts adjusted their expectations for the company’s profitability timeline, now forecasting it to occur later than initially anticipated. According to InvestingPro data, the company is currently burning through cash rapidly, though it maintains more cash than debt on its balance sheet.
ESS Inc. has made notable progress in reducing the costs of its Energy Warehouse and Energy Center products. The analysts recognized the company’s strategic pivot towards its Energy Base offering, which is better suited for high power, longer duration applications. This move is considered prudent, especially in light of the significant decline in lithium-ion energy storage system prices, which has increased competition in applications ranging from 6 to 8 hours in duration. InvestingPro analysis reveals concerning financials, with a negative gross profit margin of -720% and revenue of just $6.29 million in the last twelve months.
Despite these positive developments, TD Cowen advises caution to investors. The company’s product transition is occurring during a period of leadership uncertainty and critical capital funding activities. Furthermore, ESS Inc. has received a delisting notice from the NYSE, adding to the challenges it faces.
In terms of long-term prospects, ESS Inc. has indicated potential for high-margin returns, with management highlighting the possibility of long-term margins in the high 30% range. However, such outcomes are projected to be several years away. The analysts believe that the stock will likely remain relatively stable in the near term as the market seeks clarity on the aforementioned issues.
In other recent news, ESS Inc. reported a revenue shortfall for Q4 2024, with full-year revenue reaching $6.3 million, falling below the company’s guidance range of $9-11 million. This shortfall was attributed to a partner’s failure to secure funding for orders, impacting ESS Inc.’s revenue and profitability. The company is actively seeking to raise at least $50 million to fund operations through 2026. In addition, ESS Inc. launched a new product called "Energy Base," focusing on extended duration and cost reduction, which is part of their strategic shift towards long-duration energy storage solutions.
In a related development, Canaccord Genuity analyst George Gianarikas downgraded the price target for ESS Inc. shares to $3.00 from $8.00, maintaining a Sell rating. The analyst noted the growing momentum in the long-duration energy storage market but highlighted the competitive landscape with multiple technology options available. ESS Inc. is also undergoing a leadership transition with Kelly Goodman serving as interim CEO while the company searches for a permanent chief executive. The company is exploring financing alternatives, including an At-The-Market (ATM) offering, to provide operational flexibility and support the introduction of new products.
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