Shares of energy startup Bloom Energy (NYSE:BE) have advanced by 250 percent in the last year as AI data centers have pushed new energy technologies to the forefront of the investment world.
Even with such large gains under its belt, there could still be more room for Bloom Energy to generate additional returns. Is Bloom Energy the best stock to buy now, and what do the business’s long-term prospects look like as data centers keep demanding more power?
Economics of AI Power Demand & Bloom’s Solution
Bloom is one of several energy startups that are benefiting from fundamental changes in the power landscape brought about by AI. By 2035, an estimated 100 gigawatts or more of new data center demand is expected to emerge in the US. Relying on existing generation, this would gradually create an energy shortage that is expected to increase blackout risks and strain the current electrical grid. Data centers also don’t follow the typical cycles of traditional power consumption, instead operating around the clock at fairly consistent demand levels.
As such, it’s clear that new power generation will be required as data center expansion continues. Specifically, power sources that are scalable, can be placed on-site and can come online quickly are needed. This is where Bloom Energy’s solid oxide fuel cells come into play. These cells can be placed on-site as needed, allowing data centers to secure reliable, scalable power generation. Moreover, Bloom’s cells offer more predictable power costs, a significant benefit in an energy market that is likely to be marked by stark shortages in the next several years.
Bloom’s New $5 Billion AI Partnership
While fuel cells may sound somewhat speculative, Bloom Energy has already been able to deliver some fairly impressive results by selling and installing them. The business has produced four consecutive quarters of revenue growth, including Q3’s blistering 57.1 percent year-over-year increase to $519.0 million.
Bloom still posted a net loss of $23.1 million, though this was a major improvement on the $42.6 million loss it posted in Q2. Encouragingly, gross margin advanced by 5.4 percent in Q3 to reach 29.2 percent. Operating income also came in positive at $7.8 million, up from a loss of $17.5 million in the year-ago quarter.
Another major development in Q3 was Bloom’s new $5 billion AI infrastructure partnership with Brookfield Asset Management. Brookfield, itself a major investor in data centers and other digital infrastructure, will use Bloom’s technology to deploy on-site power and fuel further digital expansion. The deal could be a major turning point for Bloom Energy, especially if it leads to further business with Brookfield in the years to come.
It’s also very important to note that one of Bloom’s revenue sources may well be extremely valuable over the long run. Right now, most of the business’s revenues are generated from the sale of the fuel cells themselves, which in Q3 accounted for $384.3 million. Service revenues, however, could prove to be the real value creator at Bloom Energy.
Fuel cells are sold with service contracts that can extend for a decade or more. Right now, service revenue accounts for only a little over 11 percent of total revenues. As Bloom keeps installing more fuel cells and securing more of these lucrative long-term service contracts, though, the revenue generated by them could become a strong and highly predictable base of ongoing sales.
Can BE Support Its Valuation?
At first glance, Bloom Energy’s valuation looks difficult to justify at 12.2 times trailing 12-month revenues and 168.5 times operating cash flow. Here, however, it’s important to keep in mind that Bloom is a young business that is still growing rapidly. If it can keep turning in the kind of results it produced in Q3, this valuation could quickly come down to a much more reasonable figure.
This view also appears to be common among analysts, given BE’s consensus price target of $108.55. From the current price of $89.58, this would suggest an upside of over 20 percent on top of the 250 percent Bloom has already delivered in the past 12 months. Even so, it’s important to keep in mind that the bullish sentiment represented by price targets doesn’t fully translate to the ratings offered by analysts. Right now, BE has eight buy ratings, nine hold ratings and three sell ratings, giving it a consensus rating of hold.
Is Now The Time to Buy Bloom Energy?
Right now, Bloom Energy is trading at a price that will require considerable future growth. The business is also likely highly exposed to the general risks of the AI industry, as a slowdown in data center construction could weaken the investment thesis around BE. With fears of an AI bubble starting to show up in stock prices, Bloom could be subject to significant volatility in the near term.
For investors who are comfortable with these risks, however, there could be quite a lot to like in Bloom Energy. Bloom’s technology is well-suited to the growing needs of data centers, and the ongoing growth of AI is likely to lift both Bloom and other energy businesses that can capitalize on surging demand.
Bloom’s model of putting long-term service contracts in place for its cells could also be attractive, as cells installed during the current AI boom could generate service revenues for years or even decades to come. The large investment being made by Brookfield Asset Management is a further positive, considering Brookfield’s portfolio of digital infrastructure.
All told, BE is likely a stock that carries a fairly high level of risk but could justify it with considerable rewards if data center power consumption keeps growing as expected. Though Bloom certainly won’t be the sole beneficiary of this demand spike, the business could become a major provider of on-site power generation and benefit from that position for years to come. For investors looking for innovative plays on AI power demand and who are comfortable with elevated risks, BE could still be an attractive buy for its long-term growth potential.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.