Most people with functioning brain cells, even the most ardent climate change deniers, accept that at some point in the future mankind will have to find a viable alternative to fossil fuels. They are, after all, a finite resource and the rate of consumption continues to increase. This simple fact has led to a lot of money, both public and private, being invested in the search for an alternative. Despite that though, and a plethora of stories about how close we are to a breakthrough in various areas, the reality is that we are still a very long way from “replacing” fossil fuels; realists understand that this will not happen in our lifetimes no matter how hard some may wish for it.
The most promising area is still probably using the ultimate source of all energy on our planet, the sun, to generate the electricity that we demand. If solar power truly succeeds then, along with advances in electric cars being spearheaded by the likes of Tesla (TSLA), dependence on fossil fuels could quickly become a thing of the past. In order for that to happen, though, several problems must be overcome. First, cost will have to come down even further. Increases in efficiency, both in terms of production and storage are also sorely needed. At the moment that lack of efficiency means that huge swathes of land would have to be covered with solar farms to supply the world’s energy needs and the relatively high cost makes that an impractical proposition.
For the foreseeable future, then, controlling the rate of growth of energy consumption will be as important as developing alternative sources, and that is where EnerNOC (ENOC) comes in. They are essentially a software company, supplying demand management, or more accurately demand response software and analysis to property owners, manufacturers and utilities. By analyzing demand data, EnerNOC is able to reduce the amount of energy that customers actually consume and to avoid paying a premium for peak demand usage. For the utilities, anything that smoothes out the traditionally spiky demand cycles is an enormous plus.
The theory of demand management fits in perfectly with a short to medium term future where energy consumption comes more into focus, so from that perspective ENOC is a logical part of an energy portfolio, but, as with any investment, it is not without risk. If you believe that oil prices are going to continue to fall and will stay low for an extended period, then ENOC is not for you. We would all like to think that companies would be motivated to reduce energy consumption through concern for the environment and the future of mankind but the reality is somewhat different. What motivates companies, as it should be in free markets, is cold hard cash. If lower oil prices translate to lower energy prices in general, then demand reduction is less appealing and EnerNOC loses a significant amount of pricing power.
Given this and the company’s somewhat checkered past (they have been sued for manipulating data, for example), this would be a trade that cries out for a stop loss, even though fairly long term in nature. Fortunately, a logical level for that can be found reasonably close to current levels.
The low in October following sustained selling was $12.29, so a stop loss set on a break of that level, say at $12.20 would keep potential losses to around 17 percent based on a purchase price of $14.70.
Recent weakness has, it seems, in large part been because of a negative reaction to a couple of acquisitions made by EnerNOC, a process that has continued this week with the purchase of Canadian energy analytics company Pulse Energy. These purchases are expected to be dilutive of earnings in the short term, but that expectation is priced in at current levels. It could be argued that the long term confidence in demand management, as a concept that they suggest, is a good thing.
By conventional valuation standards, ENOC isn’t a bargain at a P/E of just under 21, but for a company that has grown revenue every year since it went public in 2007, 21x forward earnings is certainly not overpriced. That historical revenue growth averages around 18 per cent a year and the subscription-based pricing model that the company uses makes future growth the most likely scenario.
The term “disruptor” has become somewhat of a cliché in investing recently, but in many ways, that accurately describes EnerNOC. They have been pioneers in demand management for industry and have, in many cases, changed the way people think about energy use. That adjustment of attitude is becoming increasingly important as the world begins to realize that replacement of fossil fuels is not just around the corner. The potential long term benefits of that to EnerNOC make it worth the risk as a long term investment at current levels.