Back in 2006 Bloom Energy (NYSE: BE $14-16) made waves after Kleiner Perkins led a $104M Series D VC round in the company. (Bloom has raised over $825M in capital). Bloom was heavily criticised and discounted as some kind of perpetual motion machine. Fifteen years ago fuel cells seemed inefficient and too small scale to be thought of as a major energy technology.

But over the past 10 years, Bloom has made major improvements in the function, reliability, density, and efficiency of their fuel cell systems. Then they “borrowed” an innovative financial structure that makes widespread adoption of their new technology much easier.

Even after all their work and money invested Bloom is still a small company compared to the massive size ($2.4T) of the US electricity market. Just in the three verticals (data centers, healthcare, and retail) that represent “low hanging fruit” the market opportunity is close to $60B.

[There are lots of great slides in the Bloom Energy IPO roadshow deck. We’ve also taken the time to create a full transcript of the Bloom IPO roadshow. As always any serious investor will read the prospectus.]

The creaky and unreliable electric grid in the US is an even more fortunate condition for Bloom. In the US above-ground power lines are the norm which means outages are common. Stand-by generators are a common solution but they are also old and have major shortcomings like a gap in power while the generators are brought online, a limited run time, imperfect reliability and their unsuitability in “smoothing” electricity demand during peak periods.

The Bloom solution is attractive for corporate customers – particularly those that don’t function well with even temporary outages – industries like healthcare, data centers, transportation, communications, and retail are all very sensitive to power outages – even short ones. (Ever been in a big box store when they lose power? They can’t even take cash anymore so without power they are dead in the water.)

Bloom has several advantages over other distributed generation technologies like wind and solar but one unique additional one in the US is the abundant supply of natural gas.

What is the Bloom Energy “Server?”

Although they like to position themselves as a technology company the Bloom Energy Server is really a modular fuel cell system. There’s no computation going on. But the server concept is useful and their system does have advanced features like “hot swappable” modules that were introduced into the IT market by companies like Stratus back in the 1980’s.

From individual fuel cells, Bloom builds modules which make up a single system. Systems are configured into specific solutions for each customer. Systems can be expanded over time to scale up with power demand.

Our power infrastructure is old and complicated for utilities. And consumers have implemented a range of their own methods to deal with unreliable electricity – batteries, short-term power systems, and longer-term fuel-powered generators.

The Bloom solution is much simpler as shown below. It takes gas fuel in and creates stable, clean uninterrupted electricity out. Critics of Bloom have pointed out that their system only works at just above 60% of efficiency. Of course, utilities can do better at the generation phase but when the total system is considered the Bloom efficiency is pretty good – especially compared to something like solar which is intermittent and stuck at 20% or lower.

Go To Market Strategy & Business Model

Bloom goes after large companies which provide a steady stream of repeat business. More than half of their order volume is from existing customers while about half of the new orders (units) are from new customers.

In addition to additional capacity, Bloom offers customers a number of “add-on” features like fuel flexibility, high quality direct DC power, and EV charging.

Another innovation that Bloom has borrowed is the packaging of the product sale with a long-term supply agreement that finances the purchase. This is an area where aggressive financial firms like Goldman Sachs ($GS) have been very active.

The vast majority (91%) of recent bookings have been via “Third Party PPA” where the utility makes the capital investment and the end customer continues to pay a monthly operating expense.

For example, a large customer and good credit (like AT&T, Home Depot, Walmart, Equinix) has an existing electric supply agreement that they pay every month. The customer could purchase or lease a new system from Bloom but they could also bundle it with a long-term energy supply agreement.

It’s possible for a customer to have a new Bloom system with essentially no capital expense and see an ongoing 10% reduction in existing electricity costs and a smaller carbon footprint.

The go-to-market strategy gives Bloom customers a range of options and reduces the obstacles common in signing up new customers. Utilities and energy providers are also decent partners because they are looking for ways to differentiate their basic supply service and become a more “sticky” provider of power.

Business Model & Valuation

The picture below maps out how the dollars flow. The customer shown saves 2c per kWh with fuel costs (which $BE doesn’t get) included. Then the rest is broken out into Bloom product and services.

Bloom now generates positive gross margins and the trend is positive. This is key to the long-term investment case. So far the track record is solid we’d expect that the company will continue to make progress on these fronts with the benefits of scale and additional product innovation.

Turning to a quick Intrinsic Valuation (IV) for $BE it suggests the shares are being brought to the market at an attractive price. It’s possible the pre-IPO demand and aftermarket trading may change that but as it stands now investors who can buy the stock within the current proposed $13 to $15 price range should do well.



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