Stem, Inc.'s Reverse Stock Split: A Necessary Move to Avoid Delisting or a Desperate Gamble?

Stem, Inc. (NYSE: STEM) is taking drastic action to avoid a potential delisting from the New York Stock Exchange (NYSE). On June 23, 2025, the company will execute a 1-for-20 reverse stock split—a move designed to lift its share price above the NYSE's minimum average closing price requirement of $1.00. While this strategy addresses an immediate regulatory threat, investors must weigh whether the split stabilizes Stem's stock or merely postpones deeper structural challenges.

The Reverse Split: Mechanics and Motivation

A reverse split consolidates shares to boost the stock price without altering the company's market value. For Stem, this means reducing its outstanding shares from ~167 million to ~8.4 million, effectively multiplying its share price by 20. The decision stems from the NYSE's stricter 2025 listing rules, which now penalize companies that use reverse splits too frequently or aggressively.

The NYSE's Section 802.01C requires listed companies to maintain an average closing price of at least $1.00 over 30 consecutive trading days. Failure to do so triggers a six-month cure period, but Stem's recent stock price—trading as low as $0.60—had raised red flags. Compounding the urgency, the NYSE now bars companies from using reverse splits if they've done so recently or risked violating other listing criteria (e.g., minimum publicly held shares).

Financial Context: A Fragile Recovery?

Stem's first-quarter 2025 results provide a glimmer of hope. Revenue rose 27% year-over-year to $32.5 million, marking its first positive operating cash flow ($8.5 million) since 2023. Gross margins improved dramatically, too: GAAP margins jumped to 32% from -95% in Q1 2024, while non-GAAP margins rose to 46%. These gains reflect Stem's shift toward software-driven energy management services, which typically carry higher margins than hardware sales.

However, the company's balance sheet remains precarious. Despite a $30 million annual savings target from a 27% workforce reduction, Stem still faces a debt burden and cash burn that could strain its liquidity. The reverse split alone won't resolve these issues—but it could buy time to execute its software-centric strategy.

The Strategic Calculus for Investors

Pros of the Reverse Split:
- Avoids Delisting: NYSE delisting would trigger a sharp sell-off, as institutional investors often can't hold over-the-counter securities.
- Short-Term Price Boost: The split could temporarily lift STEM's stock above $1.00, meeting the NYSE requirement and stabilizing investor confidence.
- Signal of Commitment: Approval by shareholders (98% in favor) and the board's finalization of the ratio on June 9 suggest strong internal support.

Risks to Consider:
- Volatility: Post-split, Stem's shares could face speculative trading, especially if investors bet on further NYSE compliance-related gains. Historically, such volatility has been extreme: when earnings beat estimates by over 10%, the stock's volatility reached 52.38% with a maximum drawdown of 55.52% over 20-day periods, as shown by backtest results.
- Structural Weaknesses: The split doesn't address Stem's debt, cash flow, or competition in the energy storage market. Even past earnings surprises—such as those exceeding estimates by 10%—failed to translate into gains, yielding a -50% return over 20 days with a negative Sharpe ratio of -0.67, underscoring poor risk-adjusted performance.
- Regulatory Scrutiny: NYSE's new rules penalize reverse splits, so Stem must now prove sustainable profitability to avoid future violations.

Investment Takeaways

For investors, Stem presents a high-risk, high-reward proposition. The reverse split is a necessary step to avoid delisting, but long-term success hinges on whether the company can:
1. Scale its software business: Revenue from software-as-a-service (SaaS) models could stabilize margins and reduce reliance on hardware. However, past instances of positive earnings—such as those exceeding estimates by 10%—did not translate to gains, with a -50% return over 20 days, highlighting execution risks.
2. Manage debt and cash flow: Stem's Q1 operating cash flow is a positive sign, but debt reduction remains critical.
3. Compete in a crowded market: Companies like Tesla and Fluence are aggressive in energy storage, requiring Stem to differentiate through innovation.

Conclusion

Stem's reverse stock split is a tactical necessity, not a strategic victory. While it averts an immediate delisting crisis, investors must assess whether the company can translate its software pivot into sustained profitability. For now, the split stabilizes Stem's NYSE listing—a prerequisite for accessing capital markets—but the real test lies in execution. Aggressive cost-cutting and SaaS growth could position Stem as a survivor in the clean energy sector, but complacency risks repeating past mistakes.

Investment Advice:
- Hold or Buy: For long-term investors willing to bet on Stem's software strategy and NYSE compliance, the stock could offer upside if Q2/Q3 results align with Q1's momentum. However, historical data cautions that even positive earnings surprises have led to significant losses, with a -50% return over 20 days post-announcement.
- Avoid: Short-term traders may face volatility post-split, while skeptics note Stem's history of cash burn and debt.
- Monitor Metrics: Track operating cash flow, software revenue growth, and debt-to-equity ratios to gauge progress beyond the reverse split.

In the energy storage race, Stem's survival hinges on more than arithmetic—it requires execution.