Everyone talks about GPUs, memory, and lasers.
But the real bottleneck is the only one both humans and data depend on to run.
IT'S WATER.
$ERII is up 8% today since I dropped my long thesis yesterday to clients.
So here's why this $500M water tech stock down 50% in 3 months could be an asymmetrical bet.
I first spotted $ERII in March, but I was too early.
Now I think a few catalysts put this small cap gem in prime re-rating territory.
$ERII makes a special piece of tech that makes desalination plants economical. The PX Pressure Exchanger recycles the pressure inside a seawater reverse osmosis plant and cuts its energy use by up to 60%. This hero product accounts for over 90% of $ERII's revenue and commands gross margins over 60%.
I love $ERII because it feels like a high margin IP business, not a low margin industrial, despite being priced like one.
So why is the stock trading half off its February $16 price and a fraction of its comps?
The Middle East, the world's largest desalination market, is 50% of their revenue. And two huge gut punches nuked the stock across two ER's.
1) Revised 26 guidance down before the Iran War started.
2) Removed 26 guidance entirely during the War due to the massive ME concentration of business. Then the CEO and CFO both left.
But the business isn't broken. And the Iran War looks to be resolved, making more signals of sustained ME peace a real catalyst.
Q1 is their smallest quarter historically and revenue still grew 20% YoY. The ugly Q1 loss was a one time charge from killing their CO2 side project. Q4'25 was a record $66.9M at 67% gross margin.
The balance sheet is a fortress too. $77M net cash, almost no debt, a 9x current ratio, ~$27M TTM FCF, and they buy back stock at a ~9% yield. You get paid to wait and this is not a small cap where you get diluted.
The tailwinds are massive for $ERII's desalination business and I think the market may be mispricing $ERII's growth potential on 4 vectors.
1) Fast Growing Market
Water scarcity isn't a regional story anymore, it's a global one. Rivers and aquifers are drying up while population, industry, and now AI all pull harder on the same shrinking supply, and desalination is the backstop the world keeps falling back on. Reverse osmosis dominates new capacity, every RO plant needs an energy recovery device, and the PX is the standard, so $ERII's installed base scales as desal scales globally.
2) Water As Warfare
The Iran war turned water into a weapon. Plants got hit across Bahrain, Kuwait, the UAE and Iran, and with desal supplying up to 90% of water in some Gulf states, every ministry just learned a centralized, aging fleet is a strategic weak spot. The answer isn't to build less. It's to harden, decentralize, and build MORE, which means more PX sales.
3) Middle East AI
Every gigawatt of compute landing in the Gulf has to be cooled, and up to 90% of the region's water comes from desal, so water is the constraint of where you can build. PwC sees Gulf data center capacity tripling to ~3.3GW by 2030, all running through RO where $ERII sells the picks and shovels. Management isn't even telling this story yet, but when they bring in a new permanent CEO, I could see him pushing AI + water scarcity angle.
4) AI Factory Wastewater Upside
This one is early but $ERII just carved wastewater out as its own segment, it's ~6% of revenue today. It's the OTHER end of the AI water story: data centers and the chip fabs feeding them discharge dirty water and the laws require treatment before it leaves. ERII uses the same PX tech here with same 60% margin profile, and management expects this to get bigger in 2027.
The comps do a ton of the work to feel good about the valuation here.
$ERII has the smallest market cap and the highest gross margin in water tech (63%) while trading at the LOWEST 24x TTM PE multiple. ~25x vs $XYL 28x, $BMI 30x, $FELE 31x.
The catalysts?
- Iran War peace deal finalized
- $300B Iran investment would boost any stocks with strong ME geography exposure
- Company re-affirms guidance for 2026 in Q2 or Q3 call
- New CEO joins replacing interim CEO and maybe introduces AI angle to boost narrative
The risks.
Re-escalation. If Israel and Iran flare back up, the momentum dies and this might retests the lows. Projects will get even more delayed.
Guidance. The reinstatement they flagged for Q2/Q3 could be pushed to Q3/Q4 and come later than we hope.
Leadership. The CEO retired and the CFO resigned in the same quarter, and the permanent CEO search is still open.
Lumpy revenue. This is a project driven, back half-weighted business where big orders slip without warning. February proved it.
But the floor is real. ~$77M net cash (nearly 1/5 MC), no debt, a 9% buyback. A $500M company growing 20% retiring its own shares is not the kind that drops to 0.
DYOR. NFA.
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