adminThe transition from fossil fuel to renewables for power generation is gathering pace, and a key part of that transition is managing intermittency of solar and wind power. There are a number of ways that this is being addressed. Firstly, power use can be time shifted (e.g., running air conditioners when the sun shines to have a cool house in the evening) or demand managed (e.g., having your grid supplier control the timing of your pool pump). Secondly, the sun always shines, and the wind always blows somewhere on planet earth, so providing connection across distance helps. HVDC (High Voltage Direct Current) cables provide electricity distribution over thousands of kilometers with small losses. The Texas freeze of a couple of years ago could have been ameliorated by the Texan grid being connected either east or west, which were not affected by the big storm. Lastly, battery technology has grown at record pace to enable solar and wind power energy management at scale. This requires not only the battery hardware, but also smart software to address issues like frequency regulation and to supply power to bridge intermittency. This is the area that Fluence Energy (NASDAQ:FLNC) plays in. I’ve published two articles on the emergence of this company. One in late 2022 concerned its formation as a JV between the battery technologies of Siemens Aktiengesellschaft (OTCPK:SIEGY) and AES Corporation (AES) and early days after the Nasdaq listing, including the acquisition of Nispera. The second report reflected on why Fluence’s share price was moribund. Here I look again at Fluence as it has experienced another lackluster year (down 25.1% year-on-year). Strangely, the share price fell 20%, from $21 before the Q2 2024 earnings reporting to $16.65 as a result of the 10-Q quarterly report and 2024 earnings call transcript on May 9. It has recovered somewhat to $18.53. Notwithstanding this lack of share price progress (or perhaps because!), I find Fluence well worth investor attention.
My Reports of 2022 and 2023
In my 2022 report, I observed that things take time to get a substantial company moving. Teams don’t get built on a dime, nor does building a new corporate culture or establishing markets with new products happen overnight. The second report in 2023 addressed some of the complexities that the market may have overlooked as Fluence began to get into its groove with a sophisticated and complex set of products. This in part was about changing the positioning of the company from being involved just with big batteries to offering “transmission assets” that encompass issues beyond just storage, such as data prediction and management to ensure grid reliability. An issue highlighted in the May 2023 article was hints of a focus on the Indian market as a new and soon-to-be major global player. And the re-emergence of the US as a big player through the Biden Inflation Reduction Act was foreshadowed.
A number of the issues considered in the 2022 and 2023 reports are now maturing in interesting ways as I refer to in my comments on the Q2 2024 earnings call transcript.
Q2 2024 Quarterly Reporting
The thing that got my attention recently was a dramatic decline in Fluence’s share price on the announcement of Q2 2024 earnings. So I went looking for trouble. The strange thing is that I didn’t find it. Instead, the company seems stronger than ever, with areas that will drive the company to profitability becoming clear.
CEO Julian Nebreda outlined progress on five key strategic objectives:
i) Delivering profitable growth: There was record free cash flow of ~$88 million in the first half of the fiscal year. He claims that this is proof of Fluence’s business model and working capital management.
ii) Progress in successful product developments: The example given was the Gridstack Pro line with a new 5000 series product. It is a larger and more energy dense 5 MW 20 foot enclosure. Another example was the first domestic content product allowing US customers to benefit from the Inflation Reduction Act.
iii) Initial US battery module manufacture this year: Battery manufacture is a key US domestic content requirement.
iv) Use of Fluence Digital as a competitive differentiator and margin driver: Digital contract values are up 75% (on a $ basis) year on year.
v) Working better: Release of its second annual sustainability report.
Key Numbers Include:
i) $623 million revenue in the quarter.
ii) Third consecutive quarter of double-digit gross margin.
iii) Q2 2024 ended with $541 million cash, up $65 million from Dec. 31, 2023.
iv) $700 million of new orders, solutions business contracted 2.2 GWh, services business added 900 MWh, and digital business added 3.1 GW new orders.
v) Backlog of $3.7 billion gives strong visibility for future revenue.
vi) Based on customer feedback, continued strong revenue growth in fiscal ’25 of ~35-40% from fiscal ’24.
vii) Current pipeline is $16.3 billion (up $2.9 billion from last quarter) with expected conversion 50% probable over the next 24 months. An added comment about queues in the US is that there is ~1000 GW of renewable capacity waiting for a grid connection!
viii) Encouraged by growing global opportunities; BNEF indicates up to 2030, 670 GWh of new utility storage (includes China).
ix) For Fluence: US largest market (BNEF 350 GWh new), Australia second-largest (BNEF 25 GWh new), Germany third-largest market (BNEF 23 GWh new).
Data Centers
CEO Nebreda gave a significant and very upbeat answer to a question about data centers and 24/7 power. Data centers require a lot of power for AI applications. Fluence has been very, very successful in providing solutions with partners. The demand is big. The really interesting opportunities are offgrid solutions, and Fluence has been very successful with these. It’s worth quoting Nebreda on how Fluence and battery solutions is positioned: “If you need a 24/7 solution the fastest way to firming that capacity and ensuring 24/7 100% availability, if you are off the grid or on the grid, battery technology is the best way to do it. There’s nothing that is anywhere near.” Julian Nebreda said that this is a big opportunity and that the products are not yet fully resolved, but to watch this space as it is industry transforming.
Another area that will be transformational and that Fluence is addressing is storage of 12 hours or more.
On location for manufacture, when asked about Europe, Julian Breda indicated that India looked more interesting at this stage.
What the market thinks
I’ve noted the patchy and contradictory treatment of companies involved with major transitions by Seeking Alpha, and Fluence is no exception. Fluence is a company formed by combining the energy storage businesses of two major global companies (AES Corporation and Siemens Aktiengesellschaft). The fact that just one Seeking Alpha author has covered the company in the past 90 days (“strong buy”) is remarkable. The treatment by Wall Street is different, with coverage by 25 analysts (14 “strong buy,” 7 “buy,” 3 “hold” and 1 “sell”). Wall Street is very positive about the company and this contrasts with Seeking Alpha’s Quant rating of “Hold.” I find Seeking Alpha’s “D” for “growth” a mystery. Seeking Alpha has Fluence consensus estimates for PE falling from 81.9 in 2024, to 19.9 in 2025 and 12.5 in 2026. Consensus Earnings/share growth is 312% in 2025 and 59.0% in 2026. How do these numbers result in a “D” for “growth” and “C-“for profitability? I’ve said it before and I’ll say it again: I think Seeking Alpha needs to rethink companies in emerging spaces in determining its Quant ratings. I’m with Wall Street on being very positive about Fluence.
Conclusion
It isn’t often that pretty black-and-white investment outcomes, either of which is credible, are out in the open for all to see. The first involves a climate emergency and buy-in by just about every country. The key summary goal is a trebling of renewable capacity by 2030, with energy storage/management a key part of the solution. This represents a huge opportunity for the renewable energy/energy management sector. Renewables are off and away with China likely to achieve the ambitious 2030 goal of 1200 GW renewable energy this year. Already a goal of 2800-3000 GW for China and globally 11,000 GW by 2030 is being taken seriously. The stimulus for solar PV and offshore wind to achieve these goals is huge, but I think that, since renewables are intermittent, energy management has even bigger growth potential. Grid scale and domestic lithium batteries are a huge part of this story and Fluence was formed to capitalize on this by two huge companies (AES and Siemens) spinning out their energy storage technologies to form Fluence. While Fluence is a young company, it has old bones and deep knowledge of the emerging battery space and energy management more generally.
The Q2 2024 reporting reviewed above makes clear that Fluence is now a major force in big battery markets in traditional established markets of Europe and the US. The Biden administration is clear about the need to rapidly decarbonize, although the oil and gas and automotive industries are trying to slow things down.
It’s interesting that Fluence also has a significant interest in India, one of two countries (the other China) that by their huge developing populations, will decide the success or failure of attempts to address the climate emergency. The Indian story for Fluence is still “under the radar” but mention of India keeps cropping up. I think India is an enormous market opportunity to watch out for.
The above makes clear that if viewed from a climate perspective, Fluence has a lot going for it.
A challenge that looms in November is that the other candidate in the US Presidential race, Donald Trump, is adamant that he will target the renewables industry and return fossil fuels and the internal combustion engine to what he sees as their proper place.
Hence, the binary future for Fluence and many other players in the renewables industry. For me, it’s clear because I think that if we don’t urgently exit fossil fuel use and electrify transport, there won’t be a market to invest in. So I’m all in on renewables, including Fluence.
I’m not a financial advisor, but I pay close attention to massive risks and opportunities in the energy and transport spaces. I hope that my perspective is of interest to you and your financial advisor as you make your choices about your energy investments.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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