Fluence: Perfect AI Play And Biggest Winner In AI Wars

seekingalpha10-07

Fluence is in a great position to capitalize on the anticipated growth demand in the battery energy storage systems market.Recent AI frontier model improvements suggest that energy demand from these ...

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In fact, their new chain-of-thought models prove that the scaling laws are nowhere near its limits. This means that the compute required for frontier models will likely continue to grow at an exponential rate. With this exponential growth in compute comes an exponential need for energy. The Unbounded Scaling of AI and its Energy Implications OpenAI's o1 model represents a paradigm shift in frontier models and has far more room to improve. In fact, current research seems to indicate that there is no end in sight in how large these models can be scaled without diminishing returns. This means that large companies invested in these frontier models will likely continue to throw countless billions of dollars building up their compute infrastructure. Research firm Epoch AI estimates that the power required for training frontier models has increased by 2.2x every year since 2014. What's more, this relatively smooth trend does not appear to be slowing down. In 2024, training frontier models required roughly 10M watts of energy and has skyrocketed since the beginning of the year. In fact, we are quite close to the point where training a frontier model could require a whopping 100M watts of energy. These frontier models' inference costs could increase at an even greater pace, especially given how much more inference chain-of-thought models like OpenAI's o1 require. All of this means that frontier model companies like OpenAI, Anthropic, Alphabet (GOOG), Microsoft (MSFT), and Tesla (TSLA) will likely continue ramping up their energy infrastructure at a rapid rate. Fluence is the Biggest Winner in the AI Wars While Fluence (NASDAQ:FLNC) may not appear to be impacted by the AI wave as a BESS (battery electric storage systems) manufacturer, the company may turn out to be the largest winner in the global AI arms race. Fluence is incredibly well-positioned to capitalize on the AI boom as a result of the vital role it plays in energy storage for solar PV. While nuclear energy has dominated headlines as a potential energy solution for AI, solar PV will likely play an even greater role in supplying AI's growing energy needs, especially in the short term. There are several reasons for this, including but not limited to, the unprecedented declining cost-curve of solar PV technologies, the relatively short time frame in which projects can be completed, and its clean nature. As frontier models continue to scale exponentially, a far greater percentage of the budget will have to be dedicated to energy. As such, companies will likely look to invest in the most cost-effective energy solutions, which is increasingly solar PV. Fluence's BESS products just happen to address solar PV's intermittency issues, which have historically been the technology's largest bottleneck to adoption. It will be hard for solar manufacturers to make money in Solar PV, even with growing AI energy demands as a result of overcapacity and commoditization. However, the BESS space is far less crowded and commoditized at the moment, which means Fluence should be able to experience far greater margins than those experienced in solar PV manufacturing. This means that Fluence will benefit from the demand growth driven by AI without the downsides of little to nonexistent margins. Rapid Project Buildouts In an industry where companies are racing to build out the most powerful and performance frontier models, the ability to stand up utility-scale energy plants is paramount. This means that while alternative energies like nuclear make sense in theory, frontier model companies will likely look to solar plus storage as the go-to choice for powering their models' training and inference. After all, utility-scale solar is among the fastest energy technologies in terms of buildout. Whereas utility-scale solar projects may only take a few years to complete, nuclear plants could take a decade to complete as a result of the complexities and regulations involved in nuclear. Fluence helps fill the weakness that has traditionally plagued solar PV, which is cheap energy storage. As battery costs continue to decline and the scale for BESS systems increases, BESS products will likely become even cheaper over time. This makes solar plus storage increasingly attractive for large-scale AI projects. Given that Fluence is currently leading the BESS industry, the company is poised to capitalize on any short-term demand spike. Its other major domestic competitor, Tesla, is unlikely to sign major BESS contracts with frontier model companies, given that Tesla has its own AI ambitions. Moreover, its CEO Elon Musk has publicly feuded with many of the top executives at the frontier model companies. This makes it likely that Fluence will capture the majority of the BESS demand from the frontier model companies. Fluence is experiencing high demand, which was evident in the fact that its backlog increased by 52% YoY and $22 QoQ in Q3 of 2024. Fluence Improving Financials Fluence's Q3 results showcased significant improvements in profitability and operational efficiency. The company's gross margins increased 4.1% YOY to 17.2%, and it also posted a net income of $1.1 million. While this may not seem significant, it marks a major improvement from the $35 million loss in the same quarter of 2023. Adjusted EBITDA also made a positive improvement to $15.6 million, compared to the negative $27.5 million from the year prior. The company's impressive order intake of $1.3 billion and an increased backlog of $4.5 billion is more evidence of growing demand for its products. Fluence has improved its GAAP gross profit margins at an impressive rate over the past few years Fluence Gross Margins (Fluence) Not All Positives On the downside, Fluence's revenue declined 10% YOY to $483.3 million as a result of delivery timing. The company also lowered its revenue guidance for fiscal 2024 to $2.7-$2.8 billion, which is down from its previous guidance of $3.3 billion. While Fluence improved its free cash flow to $64.3 million from negative $162.4 million last year, high operating expenses still remain a challenge. Despite these concerns, Fluence's strong demand and backlog position it well for the coming years. Fluence is also still a relatively small player in the grand scheme of things. If larger technology companies decided to jump in on the BESS industry, Fluence would likely be immediately impacted. This scenario playing out is not exactly a low probability, given how much money is at stake in the build-out of these frontier models. In fact, it would not be surprising to see frontier model companies like OpenAI or Google directly involve themselves in the manufacturing of BESS systems for internal use. Conclusion  The rapid advancement of frontier models like OpenAI's o1 is dramatically increasing energy consumption, pushing these companies to seek immediate, scalable solutions. Nuclear energy, despite its potential, is somewhat impractical due to regulatory hurdles and long development times. On the other hand, solar PV enhanced with BESS, emerges as the most viable alternative to meet these companies' energy needs. Fluence will likely play an increasingly pivotal role in meeting the demand for BESS systems domestically. Fluence still has more upside at its current valuation of ~$4 billion and represents a great alternative way to invest in the AI revolution.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2473862904"}