Why I’m Keeping Opower Stock On My Radar

  • Opower stock price has been cut in half since its April 2015 IPO.
  • The company's latest quarterly results, however imply the company could be in for multi year growth.
  • Investors should keep the stock on their radars in order to benefit from strong growth in the coming years.
Opower stock analysis

Opower (NYSE:OPWR), an Arlington-based cloud electricity service management company, is a unique company and a paradox of sorts. After all, the company’s chief mission of ‘‘motivating everyone on earth to save energy’’ seems to fly in the face of the electric utilities it makes money from and the utility business model, which at a basic level is to sell as much electricity as possible. What makes Opower particularly interesting is that it makes money by working with utilities and encouraging people to consume less electricity. Opower makes software that uses a little social trickery to help people conserve electricity. Basically the company collects massive swathes of data that let people compare their electricity consumption with that of their neighbors and makes money by selling multiyear subscriptions of its software to utilities.

Opower figured early on that what motivates consumers the most to become energy efficient is not because it’s good for their environment, but rather because it helps to save them money. The company marries behavioral science to energy efficiency and uses the data it collects to provide utility customers with highly personalized energy reports that show them how much electricity they are consuming and where they can cut back. Opower pegs the U.S. behavioral efficiency opportunity at $2.2 billion.

Sizable Opportunity, but Why Is Growth Slowing Down?

Opower has already partnered with more than 93 utilities around the world, including 28 of the 50 largest utilities in the U.S. But, the company still has plenty of room to run considering that there are more than 3,200 electric utilities in the U.S. that connect to the electric grid. Opower signed a $90-million contract with Pacific Gas & Electric just a few days ago, the company’s biggest contract in its short 8-year history.

Opower’s business model sounds rather exotic on paper. But, alas, the glamour of its business has not translated to profits yet. The company’s SEC filing at the time of its IPO reveals a history of losses, a streak that has unfortunately extended to its public life. And, even more worryingly, Opower seems to have hit a major speed bump that has slowed its growth. Opower has guided for 14% top line growth in the current fiscal year, a pretty dramatic slowdown considering that the same metric expanded 45% in 2014.

Opower reported its first quarter fiscal 2015 results a few days ago. The company managed to beat both top-and bottom line expectations. Opower revenue in the latest quarter came in at $33.42 million, good for 17% Y/Y growth, and a GAAP EPS of ($0.22) vs. ($0.32) for the prior year period. Subscription revenue (90.9% of revenue) was up 16% to $30.386 million while services revenue (10.1% of revenue) grew 27.4% to $3.035 million. Opower’s operational costs grew only slightly faster than top line growth--20.5% growth during the quarter, which is a good sign that the company might be on course to achieve its goal to finally become profitable by 2017. But, Opower certainly needs to keep a lid on its stock-based executive compensation. The metric jumped from $1.662 million in the prior year period to $5.004 million, a hefty 201% growth. The company’s stock-based executive compensation currently sits at 15%, which is reasonable for a young SaaS company so no much worries here. The company’s sales and marketing expenses, the biggest line item, equals 43.4% of revenue but is comparable to many young SaaS companies,’ most of whose marketing expenses sit north of 50% of revenue. The metric, however, is not expanding too fast--20.9% growth during the quarter--which is tolerable.

Still the question that begs for an answer is why has Opower’s top line growth slowed down so suddenly? I’m aware the company lost two large European customers last year, including a long-time customer that Opower worked with since its early days. But Opower also signed expansion deals with at least 59 of its existing customers which must have closed the gap left by the loss considerably, or even perhaps completely offset it.

On the surface, it appears as if Opower’s business model is flawed right off the blocks. After all, it involves selling software to utility companies that encourages their customers to consume less, not more, of what these companies sell. An argument can also be made that only regulated utilities would care to buy Opower’s products because they are forced to use it, while the rest would simply bail if it does not help to improve fundamentals such as customer retention rates or improve new customer growth.

A deeper peek into the dilemma, however, reveals that there are at least four types of utilities that would be happy to use Opower products:

  • Vertically-Integrated Utilities-- these type of utilities wouldn’t buy Opower’s products for the obvious efficiency and cost-savings reasons, though they might due to their own greenwashing reasons. These companies, however, would consider buying Opower’s energy-saving software due to peak reduction and improved customer engagement. Opower has behavioral demand response products that cover these types of customers.
  • Utilities in Competitive Market--these types of customers buy Opower’s products because they help to differentiate their brands. Utilities that fall under this category can recoup their investment in Opower through higher customer acquisition rates and better customer retention.
  • Utilities with lost revenue adjustment mechanisms resulting from energy efficiency programs--utilities that run a program that allows them to recoup lost revenue from energy efficiency are likely to buy Opower’s products.
  • Utilities Existing in Decoupled Environments--these types of utilities are a hard sell because they simply won’t buy unless they are convinced that Opower products will have a tangible positive impact on their financials.

Opower also offers a pretty comprehensive platform that utilities can use to replace their multitudes of disjointed applications and lower their costs.

Smaller Losses

The real proof of the pudding, however, lies in the eating. Opower’s previously mounting losses have made the shares lose favor with investors, with the Opower stock price being cut in half since the company’s IPO.

Opower’s current top line growth of 17% from a rather small 30-something million quarterly revenue base is not impressive by SaaS standards. Much larger SaaS companies are growing faster than that. I have to admit that my opinion about the company was, just like the market’s, divided.

But, it’s the huge $90 million Pacific Gas & Electric Company deal that it recently nabbed that has helped to restore some of my confidence in the company. The contract will stretch over a 7-year period, close to 3 times Opower’s weighted average customer contract length. Opower will start booking revenue from the deal starting from fiscal 2016. Revenue from the deal will provide as much as 10% of Opower’s revenue during the early stages of the contract, which provides excellent revenue visibility. Large deals such as these also mean that the company’s customer acquisition costs come under less pressure.

Bottom Line

While Opower’s shares might not have much upside during the current year, I believe this might change come next year. Opower is trading at an Enterprise Value (EV)/2015 sales multiple of less than 3 with earnings projected to grow at 20% CAGR over the next five years. The shares are up 9.50% after the earnings beat, though I don’t think they will advance much at this stage. I would advise keeping the company on your radar for the rest of the year and loading on the shares at the end of the year if the outlook remains favorable.

You can check out Amigobulls' Opower stock analysis video for a quick look at key fundamentals.

Brian Wu Brian Wu   on Amigobulls :

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