The Grid of Tomorrow

Our hearts sank when we saw the news that Oracle Corp. (NYSE: ORCL) plans to acquire Opower Inc. (NYSE: OPWR) in a $510 million all-cash deal.

It wasn’t so much that we would have liked to collect a fat 30% premium from the tech giant. That would have required the sort of aggressive bet that a conservative income-oriented publication such as Utility Forecaster can ill afford to make.

After all, shareholders of the smart-grid upstart, which had its initial public offering (IPO) a little more than two years ago, have suffered a steady and worrisome decline.

Shortly after its market debut in April 2014, Opower peaked at $25.23 per share, and then it was all downhill from there, with the stock hitting a closing low of just $6.07 per share in March. Even with the premium Oracle is paying, many Opower investors are likely still significantly underwater.

Meanwhile, short interest, while off from its peak last fall, was still at an alarming level recently. Opower’s short-interest ratio, which compares the total number of shares held short to average daily trading volume, was a staggering 62.6 as of mid-April. And nearly 27% of Opower’s float was held short. Clearly, the stock was not quite ready for prime time, at least as far as Utility Forecaster is concerned.

Rather, we would have liked to have seen Opower have a chance to mature as a standalone entity, instead of being swallowed whole by a company where its contribution to the bottom line will barely move the needle.

When Suitors Come A-Calling

Opower was among the more promising of the tech companies partnering with utilities. Indeed, we’ve written about the firm a few times previously.

Working with more than 100 utilities worldwide, Opower offers the sector the sort of cloud-based software underpinned by big-data analytics that will prove essential to managing the grid of tomorrow—one that seeks to balance electric generation from reliable central power with decentralized and more variable renewable sources.

The firm was originally launched with the aim of making a utility bill that better informs customers about their usage and thereby improving energy efficiency.

Over time, Opower discovered that consumers, who on average really only care about having reliable power and low utility bills, could be compelled to be more energy efficient by showing them how their usage stacks up against their neighbors. For whatever reason—whether it’s simply guilt or keeping up with the Joneses—Opower discovered that behavioral efficiency works.

And the company’s savvy management tailored its products to various utility business models and regulatory environments.

Of course, Opower will continue to play a role in the industry, just under the aegis of Oracle. From the tech giant’s standpoint, Opower’s products complement its existing utility-sector offerings.

“Together, Oracle and Opower will provide the industry with the most complete, modern and integrated cloud platform for the entire utility value chain, from meter to grid to end-customers,” Rodger Smith, senior vice president and general manager of Oracle Utilities Global Business Unit, wrote in a letter to customers and partners.

Place Your Bets

Our lament about Opower boils down to the fact that the power-utility sector is undergoing a huge transformation in its century-old business model, and while there’s no shortage of tech firms seeking to capitalize on this shift, there are virtually none that we’d feel comfortable recommending to subscribers.

And we would like a piece of the action–if only to offset some of the risk that incumbency and regulatory support isn’t quite enough for stodgy utilities to fend off threats to their business model.

But such bets are better left to venture capitalists than retail investors. After all, the stodgy utilities will likely be here for the long haul, while many of their would-be tech usurpers won’t.

At this point, it’s impossible to know which software or storage technology will prevail in the marketplace. Indeed, if you’re keeping count, we’re already in the midst of the third green revolution: The first two–in the late ‘70s and late ‘90s–ended in tears and recriminations.

This time around, however, renewable technologies are becoming increasingly cost-efficient, while benefitting from significant subsidies along with regulatory mandates.

At the same time, the crash in energy commodities likely pushes out the timeline for change. Utilities and the regulators who oversee them won’t feel as much pressure to pursue greater efficiency when energy prices are low, since that keeps a lid on consumers’ bills and, therefore, any outcry from ratepayers.

As utility investors, we want our favorite companies to capitalize on the renewables opportunity while also having time to defend against (or adapt to) the threat renewables pose to the traditional utility business model.

But we wouldn’t mind if our portfolios got a growth kicker from one or two companies that are partnering with utilities to help spur such changes.

Since we can’t know what the future holds, one way to play the smart grid might be to take a basket approach.

Though it may seem like a narrow niche, there is at least one investment vehicle that appears tailored to this theme. But we’re also wary of Wall Street’s tendency to create products that exploit investor interest in certain themes. Such investments often have significant shortcomings.

We’re going to kick the tires on this one over the next few weeks, and if we like what we see (or even if we don’t), we’ll provide a thorough analysis in the “Utility Beat” section of the next issue of Utility Forecaster.