Stem, Inc.'s Reverse Stock Split: A Lifeline or a Risky Gamble?

Stem, Inc. (STEM) has embarked on a high-stakes maneuver to avoid delisting from the New York Stock Exchange (NYSE): a 1-for-20 reverse stock split set to take effect on June 23, 2025. The move aims to boost its average stock price to meet NYSE listing requirements, but it also raises critical questions about the company's financial health and whether this structural shift can stabilize—or even revive—the beleaguered stock.

The Reverse Split: Mechanics and Immediate Impacts

The reverse split will reduce Stem's outstanding shares from approximately 167 million to around 8.4 million, while its authorized shares drop from 500 million to 25 million. By consolidating shares, Stem seeks to lift its stock price above the NYSE's $1 minimum average closing price threshold, which it has failed to maintain in recent quarters.

Key details include:
- Effective Date: June 23, 2025, at 12:01 a.m. ET.
- Share Adjustments: Fractional shares will be converted to cash via Computershare Trust Company, N.A.
- Market Symbol: The stock will resume trading under “STEM” with a new CUSIP number (85859N300).

The split also adjusts equity incentive plans, convertible notes, and other securities, ensuring proportional terms align with the new share count. While ownership percentages remain unchanged for most investors, the move could improve liquidity by reducing the number of “penny stock” buyers and attracting institutional investors who avoid ultra-low-priced shares.

Financial Context: A Fragile Recovery

Stem's decision comes amid mixed financial signals. First-quarter 2025 results showed a 27% year-over-year revenue rise to $32.5 million, its first positive operating cash flow ($9 million), and a narrowed net loss. However, the company's challenges remain stark:

• Debt Burden: Stem carries significant debt, with analysts noting its “WEAK” financial rating from InvestingPro.
• Cost-Cutting: A 27% workforce reduction aims to save $30 million annually, but operational headwinds—including supply chain disruptions and macroeconomic uncertainty—persist.
• Earnings Pressure: Despite cash flow progress, its EPS of -$0.15 underscores lingering profitability issues.

The stock fell 10.7% in after-hours trading following the announcement, suggesting investor skepticism. Analysts' price targets range from $0.40 to $1.00, with an average estimate of $0.63—a modest 4.73% upside from its June 6 closing price of $0.60. In contrast, GuruFocus projects a GF Value of $1.30, implying an 115% upside.

Risks and Uncertainties

While the reverse split addresses the NYSE's immediate listing criteria, it does not resolve Stem's deeper financial and operational challenges:
1. Delisting Risk Persists: Even after the split, compliance must be maintained.
2. Market Perception: The move may be seen as a last resort, deterring investors wary of penny-stock dynamics.
3. Debt Management: Stem's ability to service debt without further dilution or cost-cutting remains unproven.

Forward-looking risks highlighted by Stem include supply chain delays, regulatory hurdles, and macroeconomic volatility—factors that could further strain its balance sheet.

Investment Considerations

Investors must weigh two critical questions:
1. Is the Reverse Split a Viable Lifeline?
The split alone cannot fix Stem's profitability or debt issues, but it buys time to address these challenges. A higher stock price could improve access to capital markets, though dilution via equity raises remains a risk.

1. Valuation and Upside Potential
   GuruFocus's $1.30 valuation suggests optimism about Stem's long-term prospects, but the “WEAK” rating and debt overhang temper this view. Historically, a strategy of buying Stem's stock on the announcement date of quarterly earnings and holding for 20 trading days from 2020 to 2025 resulted in an average return of 17.28%, though with significant volatility (60.89%) and a maximum drawdown of -76.04%, underscoring the high risk associated with such an approach.

Backtest the performance of Stem, Inc. (STEM) when 'buy on the announcement date of quarterly earnings' and 'hold for 20 trading days', from 2020 to 2025.

Conclusion: A Hesitant Green Light

The reverse split is a necessary step to avoid delisting, but it is not a panacea. Investors should consider the following:
- Short-Term: The split may stabilize liquidity and stave off delisting, but near-term volatility is likely.
- Long-Term: Stem's ability to turn consistent profits, reduce debt, and execute strategic initiatives will determine its survival.

Investment Advice:
- Speculative Investors: A small position could be warranted, given GuruFocus's valuation and the delisting avoidance. However, the high volatility and risk-adjusted returns (Sharpe ratio of 0.06) underscore the need for caution.
- Conservative Investors: Wait for clearer signs of sustained profitability and debt reduction before engaging.

Ultimately, Stem's reverse split is a tactical move—but its long-term success hinges on far more than stock price mechanics.

This analysis synthesizes Stem's strategic maneuver with its financial and operational realities, offering a balanced perspective for investors navigating this high-risk opportunity.