Here’s the intro to a recent ad from Jason Williams for Future Giants ($1,999 first yr., 90-day refund period, renews at ??), about a “silent revolution in renewable power” …

“Hotter than the surface of the sun and with enough clean energy to last humanity for the next 91 BILLION years – experts are calling it:

‘DEEPSURGE’

“One company holds the key to this amazing new technology and their stock is set to skyrocket in value up to 59x over the coming months.”

So let’s dig in and see what he’s talking about, shall we? After all, that’s the Gumshoe mission: Remove the marketing hype so you can think for yourself about an investment.

This Future Giants newsletter says it’s “focused on finding tiny hidden gems right before they take off,” and we’ve covered a few pitches from them in the past — most recently, his ad that teased SoundHound AI (SOUN) about a year ago, which has been a popular teaser target for AI enthusiasts but has also issued tons of shares at low prices in a bid to survive, so the share price is right about where it was when he teased it in mid-2023.

And on the energy front, he spent well over a year pitching the odd gravity-based energy storage company Energy Vault (NRGV), starting in May of 2022 and continuing through last Summer. That was, like SoundHound, a SPAC story that fell apart, and has declined quite steadily ever since (first teased near $10, it’s below $1 now).

Everyone picks some duds from time to time, but when there’s a track record like that I do like to highlight it — when someone is promising that a little energy company could “skyrocket 59X,” it’s good to keep in mind, before you get sucked into the next story, that the last “new energy” stock this same guy touted as having the potential for 15,900% gains actually gave investors a 90% loss over the past two years. That means, at the very least, that we can stop hyperventilating about missing the next hot story, pause, and think it over.

But first, of course, we’ve gotta ID the stock, so you’ve got something to think over. Let’s jump to the clues.

This is how he puts it on the order form:

“… thanks to an amazing technology I call DeepSurge…

“We can now harvest an immense power source that humanity has NEVER successfully tapped before…

“The white-hot, molten core of our planet.

• It’s hotter than the surface of the sun
• Is equivalent in force to 7,614 atomic bomb blasts
• And could cover humanity’s energy needs for 91 billion years!

“Plus, as a stable, clean, and renewable power source that’s NOT dependent on the weather…

“DeepSurge is the ONLY way we can phase out fossil fuels and get to ‘net zero’ carbon.”

So we know this is a geothermal energy story, which is interesting — we haven’t had a run of teaser promos for geothermal stocks in a while. Paul Mampilly had a long-running pitch for Ormat (ORA) from 2017-2019, which is probably the closest thing geothermal has had to a “real” financially viable pure-play company over the last 20 years or so (it hasn’t generated great returns, but it has survived and has usually been profitable, though not growing much, with the price in roughly the same range as five or six years ago), and before that there was a run on little junior geothermal companies from about 2009-2011, most of which have since combined with each other for survival or just disappeared in the mists of time (the geothermal stock that was probably the most frequently touted “junior” 10-15 years ago, US Geothermal was actually acquired by Ormat in 2018).

But we’re back, I guess, as interest has risen in clean energy, and as electricity consumption in general is rising in the US, thanks in large part to AI-driven data centers. That drove a resurgent interest in nuclear power last year, and it looks like this ad is trying to paint geothermal with that same brush as a “clean energy base power” option. So what’s the stock teased by Williams?

This isn’t just traditional geothermal energy, which works in very hot spots in the world but is also cantankerous and expensive, as plant owners deal with the extremely corrosive superheated water that they pump up from underground, in places where that heat is relatively close to the surface and accessible, like at The Geysers in California (which is where most of the US geothermal plants are today).

No, apparently this is “enhanced geothermal,” which essentially makes somewhat less-hot areas more prospective for geothermal, by using the same horizontal drilling and fracturing technology that was invented for oil and gas production. From Williams:

“… we still have no viable means of tapping heat sources located more than a couple of miles below the Earth’s surface.

“That’s why geothermal power remains restricted to a few small areas…

“Where aquifers are close enough to the surface to be accessed.

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“But that’s about to change very soon….

“… a crack team of U.S. engineers tackled the geothermal paradigm from an entirely fresh perspective.

“They drew on existing fracking technology…

“And applied the latest advancements in fluid dynamics…

“Until they’d created a system so revolutionary it would allow us to harness abundant geothermal energy from anywhere in the world.

“It’s called DeepSurge.”

OK, so no more super-deep drilling, no more need to tap superheated underground aquifers. The technology is described as creating a loop, where piles are installed horizontally through the hot layers deep underground, and treated water is injected into that system, which sends the water surging back out the other end, powering turbines to generate electricity and also powering the re-injection of more cool water underground, a somewhat self-propelled cycle. And it can theoretically work almost anywhere, with one pilot plant in operation….

” … this early pilot project is already pumping out enough energy to power 20,000 homes in the nearby town…

“Thanks to an amazing network of closed-loop pipes 2.8 miles below the ground.”

More clues…

“Politicians of all stripes have pledged support for this radical new engine of our economy — with $357 million of congressional funding in the last few months.

“As a result, independent sources suggest the geothermal industry will explode nearly 10-fold, reaching a total market size of $500 billion globally….

“… the little-known firm at the heart of the super-hot geothermal revolution.

“This secretive company is where DeepSurge was born.

“It’s home to the same crack team of American engineers who invented the technology and then ring-fenced their work with an iron fortress of patents.”

And Williams says it’s cheaper power than some other options…

“18% cheaper than onshore wind…
“46% cheaper than solar…
“52% cheaper than advanced nuclear…
“And a MASSIVE 54% cheaper than natural gas!”

A few more hints about the “little-known firm” behind all this…

“The original U.S. crack team of engineers are ALL working for ONE little-known firm….

“This firm has 55 years of experience in the field…

“Spanning across 30-plus countries…

“And covering activities ranging from exploration to geothermal plant operation.”

And a hint about one of the institutional owners:

“… investment titan BlackRock has upped its stake in this company TWICE in just the last few months, to become by far its biggest shareholder….

“by AUGUST 1, this company will be all over the news and the profit margins on offer won’t be anywhere near as big as they are right now.”

We’ve also got some other big names connected to this idea, though the wording is careful so they may well not be connected to this specific company:

“Billionaires and massive corporations are scrambling to board this rocket ship before it takes off.

“People like Bill Gates — a man with a net worth of around $130 billion…

“Legendary investor Warren Buffet, who’s worth an estimated $117 billion…

“And Meta CEO Mark Zuckerberg, worth $106 billion.

“Meanwhile, Google and Microsoft are already working to hook up their gigantic, energy-intensive data campuses to this amazing power source.”

And one that’s a bit more specific:

“BP and Chevron recently took part in a $40 million funding round for this precise technology.

“Elsewhere, oil services giant Schlumberger — which actually just changed its name to SLB to reflect its push into this new green tech — has gone one better…

“It’s now involved in 80% of the world’s projects in this energy subsector!”

Other clues? We’re told that this “groundbreaking company” is already “present” in 30 countries

And some more hype…

“… this discovery will cement America at the top of the global energy food chain once again…

“And make a small clique of early investors obscenely rich, incredibly fast.”

Not sure what he means by that, the US is really already at the top of the global energy food chain — we produce the most oil and gas, and we also consume the most. We’re also already the largest user of geothermal energy, thanks mostly to those power plants in The Geysers (though on a relative basis, Iceland is probably the global leader in geothermal).

And Williams sees this repeating the hype cycle boom that drove up shares of past alternative energy-type stocks as Plug Power (PLUG), EnPhase Energy (ENPH) and EV maker Nio (NIO), all of which has wild moves in 2021

What’s that “August 1” bit? Is it just a made-up deadline to encourage you to pull out your credit card in a hurry, as we so often see? This is how they put it:

“… thanks to a radical scientific advancement I’m going to tell you about today…

“This eco-friendly, clean power source will explode into the mainstream on AUGUST 1st.”

“This one ingenious company is perfectly placed to ride the coming geothermal boom and scoop up the lion’s share of the spoils.
Because aside from its huge global footprint…

“Plus decades of experience in the geothermal energy field…

“Drilling deep is in its DNA.

“As far back as 2008, it earned its place in the history books — by penetrating the Earth’s magma during a well drill in Hawaii.

“It was the first time white-hot lava had ever been seen outside of a volcanic eruption!”

“This amazing company has been quietly refining the fracking-inspired technology behind DeepSurge…

“Taking it to uncharted new places…

“And creating so much buzz in elite scientific circles that in 2018, Stanford University commissioned a special research paper on their ‘innovative drilling method.’

“No other firm comes close.

“It’s light years ahead of the competition, and I expect it to dominate the geothermal market for at least the next 10–15 years.

“Even if a rival comes along and tries to copy its technology…

“They’ll be consumed by a firewall of 124 patents protecting every angle of the design.”

He even lists a bunch of patents…

“Patent #11661926, covering the underground sensors used in geothermal power plants to maintain optimal performance, no matter the conditions.

“Patent #6912853, which protects the “separator” used to raise the output of a geothermal steam turbine power plant.

“Patent #7225621, detailing the company’s pipeline fluid, which has a high ignition temperature and low freezing point and is completely safe for the environment.

“And Patent #6973789, a high-level safeguard on the mechanism for producing power at remote locations using a closed-cycle vapor turbine.”

So waddya know, yes, this is good ol’ Ormat (ORA) again, the company that has arguably been the geothermal leader for decades, and which is the leader in what they call binary technology, which runs closed-loop geothermal systems that reinject water and are less dependent on hot springs (and less likely to be criticized for environmental impact or water waste… though they did have one of their exploratory Nevada projects sued by the folks behind the Burning Man festival).

What does the future look like? They see bright things coming, as they add growth in energy storage projects (using batteries) to their portfolio of mostly geothermal projects (plus some solar) — their forecast at their Investor Day earlier this year was that they’d grow revenue by about 8% per year from 2023 to 2028, and grow adjusted EBITDA by 10-11%. That would lead to about $1.25 billion in revenue in 2028 (roughly 50% growth from where it was in 2023), and about $800 million in adjusted EBITDA. What kind of enterprise value would you expect for a stable and growing company that generates about $800 million in cash flow? Maybe 10X that EBITDA, or 20X? ORA’s EV/EBITDA (non-adjusted) right now is about 14X, similar to most of the established utility companies, and it has ranged from about 10-20 over the past five years.

So… if they’ve got something like $800 million in adjusted EBITDA five years from now, and we think we’ll be willing to pay a premium price of 20X EBITDA for that, then Ormat would have an enterprise value of about $16 billion. Subtract the current debt of ~$2.3 billion (I don’t know how much additional debt they might take on to get to that $800 million in EBITDA, so that might be too optimistic), and that would mean the market cap could reach $13.7 billion in 2028. It’s only $4.4 billion now, so that would be quite a run, that would be 4-5 years of 25% annual returns. If we assume we’d be willing to pay something closer to the low end of that range in 2028 instead, 10X EBIDA, it would be less impressive — that would mean a market cap in 2028 of roughly $6.7 billion, meaning the company grows an average of about 9% per year.

Which means there are some rational scenarios where this investment works out pretty well, assuming they’re not blowing smoke about their five-year forecast for revenue and EBITDA growth. Unfortunately, there’s also a long history of relatively tepid returns from ORA, in part because of the lumpy nature of big projects and in part just because it’s mostly a low-growth utility business once projects are built. They’ve been mildly profitable most of the time, but they have pretty continually diluted shareholders, too, to fund growth projects or acquisitions — it looks like they had meaningful equity offerings in both 2020 and 2023, so in total the share count grew by about 20% over the past five years.

If that happens over the next five years, too, then that cuts into those returns on a per-share basis — the optimistic scenario of a $13.7 billion market cap in 2028 would give us almost 25% annualized returns if the share count stays at 60 million, and the stock price would be around $228 in 2028… but if that share count rises to 72 million, matching the 20% dilution of the past five years (the previous five years had roughly 12% dilution), then the stock price goes from $73 today to about $190, cutting that annualized return to about 21%. For the less-optimistic scenario, where ORA trades at 10X that adjusted EBITDA number in 2028, and we get that same 20% share dilution, the shares would go from $73 today to about $93, cutting the annualized return from 9% to about 5%.

None of that is written in stone, of course, I’m just following the growth trajectory that they outlined and using some rational assumptions. It could take off and be a hot story stock again, if there is really a surge in enhanced geothermal power projects in the US and elsewhere. It could lose some big contracts and shrink.

Right now, the analysts estimate that ORA will earn about $2.17 per share next year (adjusted), and grow those earnings by about 50% over the next two years, and the stock is trading at about 26X their estimated 2025 earnings. That’s pretty reasonable for a steady growth company, though pricier than the average utility company… and it’s possible that ORA is coming out of a 7-8 year period of pretty tepid revenue growth and building up to something more like 8-10% revenue growth, as they predict, so that’s cause for some potential optimism about the sustainability of a high earnings multiple — when they’ve had past periods of roughly that kind of revenue growth, the stock has generally traded pretty close to where it does now, at roughly 30X earnings.

So for me this seems like a reasonable idea, if not a spectacularly small or high-potential company. Ormat has certainly been an innovator and survivor in what has usually been a slow-growth industry, and geothermal might be in for a good patch of somewhat-higher growth in the next decade, funded in part by the push for green energy almost everywhere, though I don’t see any reason to be revved up about 5,000% potential returns — that would probably take the emergence of some kind of geothermal mania in the stock market… which is always possible, I guess, but certainly not predictable. The fight against their exploration near the Burning Man site in Nevada reminds us that permitting is tough, even for relatively “clean” energy projects on federal land, and all the talk about streamlining permitting for geothermal projects might not lead to any real acceleration (sort of the same challenge that faces the nuclear industry, though at smaller scale and with somewhat less bureaucratic molasses — these projects take a lot of capital, and a long time to develop, and they have enough of an impact to draw the ire of local land use and environmental activists)… though Ormat does also have the advantage of a global business, with active projects around the world. Their portfolio of potential projects for development is very Nevada-heavy, but that could change, and the World Bank has been pretty enthusiastic about ramping up funding for geothermal projects over the past decade or so.

I’d go into this investment expecting that ORA will most likely provide average returns in the kind of “normal” range of 5-20%/year. The company was quite a bit smaller during the little newsletter “bubble” for geothermal stocks 15 years ago, and it had a business that was less steady (more building new projects, less operating existing projects)… but the stock did fall about 60% from the early 2010 highs into the 2011 lows, so we might think of that as a reasonable guess at the downside risk, that the shares could drop to something like $30 if things go poorly for a few low-growth years again. The drop during the COVID panic year of 2020 was only about 40%, and the drop after shares had a little runup with some Paul Mampilly enthusiasm back in 2017 was about 30%, so perhaps things will be less dramatic next time we see a drop. The fact that the valuation is on the high side, at 33X earnings, and there’s not a lot of potential for significant margin expansion or shocking growth, probably puts a bit of a damper on this one… but the potential of a triple in five years, with the downside risk probably something in the 30-60% range, indicates to me that the market is probably getting this one about right.

There are some interesting little companies in the geothermal space again, too, though they’re mostly still venture-funded startups at the moment — some that have caught my eye from time to time, and who are doing enhanced geothermal projects, have included Fervo Energy, which has a pilot project with Google, and Eavor, which is building a plant in Bavaria, though there are lots of earlier-stage hopefuls as well. We’ll see if this wave of interest creates another wave of IPOs that gets people excited, but for now, as has usually been the case, Ormat will probably remain the most “real” of the pure-play publicly traded geothermal stocks.

So… interested in betting on a new surge for geothermal? Have other favorites? Let us know with a comment below…