Hydrogen stocks have been some of the worst-performing stocks this year. FuelCell Energy (FCEL) is one such hydrogen stock that has had a rough 2021. After spiking to nearly $30 per share in early February, shares of FCEL stock have sunk under $6.
Indeed, it appears FuelCell Energy has lost the luster it once held. This company's focus on designing, manufacturing, and operating fuel cell power plants that work on biogas, or natural gas, has previously been a huge catalyst.
However, green energy plays, particularly hydrogen-focused ones, are being pushed aside of late. I'm bearish on the stock.
Among the reasons for this decline are concerns about FuelCell Energy's long-term earnings prospects relative to the company's valuation. However, bulls on FCEL stock note that outlandish growth could be possible, if the perfect mix of conditions are present.
So, what exactly is going on with this hydrogen stock? Let’s find out.
Earnings Concerns
At some level, every stock is valued on the basis of its fundamentals. Sure, growth stocks that can capture the imagination of investors can run for a while. However, unless those expectations are backed up with consistent growth, eventually a stock will fall toward its true value.
Such appears to be the case with FCEL stock. This company's balance sheet in particular has been a concern of late. FuelCell Energy has done a lot of good work to assuage these concerns. For example, the company has reduced its debt load from $135.8 million last year, to only $34.1 million as of April 2021.
However, the concern for investors is more broad than the company's short-term debt. Looking longer-term, FuelCell Energy will need to find a way to cover liabilities of more than $56.2 million that are due within a year. More than $110.5 million in liabilities are due after that. So, while FuelCell Energy currently has a cash hoard of $139.1 million, thanks in part to being publicly listed, this is a stock with a balance sheet investors may balk at.
That's because FuelCell Energy is losing money, and has seen revenue declines of late. These fundamentals don't point in the right direction for growth-oriented investors seeking positive cash flow any time soon.
Financial Picture Murky for FuelCell Energy
FuelCell Energy primarily provides a platform for the conversion of hydrogen into electricity. The company already faces major competition from traditional power manufacturing companies. This competitive environment is one that's unlikely to improve any time soon.
Sure, demand for clean energy is likely to surge. However, new entrants are a threat to long-term profitability in any sector. Given the relative lack of a moat with FuelCell Energy's business model, this has to be a concern for investors.
Additionally, the company supplies electricity under PPAs (Power Purchase Agreements) that typically run over a period of 20 years. Interestingly, the company is not compensated for the equipment cost for a substantial period of the PPA.
FuelCell has to bear a significant chunk of the equipment cost through capital expenditures. Thus, as FuelCell Energy builds capacity, it will also likely need to tap equity or debt markets to do so.
Unsurprisingly, this has led to negative gross margins. For the company's last quarter, revenue came in at $14 million, which is 26% lower than the same period last year. However, high up-front costs led to negative margins over time.
Should losses accelerate, investors may find it difficult to own shares of this stock. More dilution or more debt won't be a good thing for FCEL stock. Indeed, this company's financial performance has been underwhelming, and investors appear to be voting with their pocketbooks right now.
Silver Lining?
Hydrogen stocks like FuelCell Energy, Ballard Power Systems (NASDAQ:BLDP), and Plug Power (NASDAQ:PLUG) could rebound.
Previous catalysts, such as the recently approved $1-trillion infrastructure bill, are likely to provide much-needed capital and demand for this early-stage sector.
Indeed, the Hydrogen Shot Initiative is what many investors are eyeing right now. This is a program where the U.S government intends to reduce hydrogen fuel production costs from $5 per kilogram to $1 per kilogram by 2030. Such a move in green energy prices could indeed spur the renaissance of this industry.
Wall Street’s Take
As per TipRanks' analyst rating consensus, FuelCell stock is a Moderate Sell. Out of six analyst ratings, there are four Hold recommendations and two Sell recommendations.
The average FCEL price target is $9. Analyst price targets range from a high of $10 per share, to a low of $8 per share.
Bottom Line
Overall, hydrogen stocks, especially FuelCell, appear to be quite risky to invest in right now.
The company badly needs to turn at least a gross profit and grow in order to boost investor confidence. However, much will depend on how the infrastructure bill and other catalysts materialize.
Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article
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