374Water: Waste Management Technology Could Result In Positive Inflection Point (SCWO)

Intro

If we pull up a technical chart of 374Water, Inc. (NASDAQ:SCWO), we see that shares recently printed a bearish moving average crossover by means of the stock’s 10-week average moving below its 40-week counterpart. Although the intermediate downtrend has been weakening (as we see through the rising histogram), shares do not have any meaningful underside support until below the $1 a share level as we see below. However, given the bullish forward-looking fundamentals as we discuss below, we would not give 374Water, Inc. a ‘sell’ rating at this moment in time. On the contrary, we would be interested in this play on the long side, but only when the technicals inform us that sentiment has indeed turned in this play.

So what’s the investment case for 374Water? First some background on this evolving company. The cleantech company was founded in 2018 and only gained access to the Nasdaq & the Russell indexes in 2022 & 2023 respectively. Since the company has no real revenues to speak of where operating profit has been basically negative since the company’s inception, 374WATER’s present market cap of $163 million is predicated on what is expected to come down the track for this company.

AirSCWO Technology – Strong Fundamental Offering

To this point, the attractiveness of this play is how the company’s technology (AirSCWO) could really make an impact with respect to providing sustained waste management solutions in the marketplace. Through a thermal process driven by high temperature as well as high pressure, the resulting oxidation reaction converts waste into clean water, thus eliminating recalcitrant wastes in the process (much better water quality). Furthermore, heat is recovered from the process, which is used to produce electricity as a byproduct. The AirSCWO units are portable and range in size depending on the capacity of the customer with respect to the quantity of waste involved. The functioning of the AirSCWO is shown below, where we see the four resulting outputs from the incoming waste.

High-growth potential companies many times begin their journeys well behind the eight-ball with respect to their financials. Many times, companies essentially run out of time (& money) before they can get their products to market. On this point, however, despite 374WATER’s negative earnings cash flow to date (resulting in stock dilution thus far), the company’s forward-looking fundamentals are encouraging as we see below.

Over the next few months, for example, 374WATER will be shipping its first AirSCWO system to O.C. Sanitation. If the oxidation unit is a success as many believe it will be, O.C. Sanitation will most likely swiftly scale up to bigger size units to take care of its waste loads over time. Suffice it to say, 374WATER will know rather quickly how the market digests the benefits of its technology. Furthermore, the company’s working capital of close to $18 million demonstrates that near-term internal operating costs will be covered adequately.

Suffice it to say, any bit of traction here and I see AirSCWO’s technology enjoying significant tailwinds with the ‘protection of the environment’ probably the biggest standalone reason for its promotion. We have seen this already with the O.C. Sanitation deal where the agency received $3.45 million in federal funding for the project.

In fact, with carbon taxes likely to come onstream in a big way in the future, sophisticated waste management solutions that reduce emissions & cost over time are bound to see elevated demand going forward. In fact, if one looks at how waste is treated at landfill sites, for example, the ability to be able to eliminate significant transportation costs (due to treating the waste on-site) also brings a significant cost advantage into the argument.

Once government bodies start funding initiatives (on the back of stricter drinking water regulations), the company should be set to scale for a number of reasons. First, not only can the company gain market share from the depleting availability of landfill sites but also from companies and municipalities that undergo the likes of incineration & composting for their waste management needs.

Furthermore, once enough AirSCWO units are actually in the marketplace, 374WATER will have the potential to get paid regularly for its installed technology through high-margin service contracts from its customers. Remember, the key here is not only treating waste in a less costly & more environmentally friendly way but also transforming waste into byproducts (as shown above) which can be capitalized on.

Conclusion

Therefore to sum up, although many times we dismiss high-growth potential companies due to their lack of cash-flows and long lead times to market (which deteriorate cash-flow generation even more), 374WATER could be close to an inflection point with respect to its AirSCWO technology. Suffice it to say, if the Orange County Sanitation District project ends up being a success, this would give oxygen to the company & 374WATER’s second system (Genesis) for its fleet applications as a result. We look forward to continued coverage.