Will Fuel Cell Energy (NASDAQ:FCEL) stock move higher or lower? Shares fell sharply Jan. 22 after a massive earnings miss. But before recent stumbles, Fuel Cell shares were on fire, rising from from 24 cents a share at the open Nov. 1 to as high as $3 a share on Jan. 21. That’s a more than 12-fold gain in two months.
As InvestorPlace’s Dana Blankenhorn wrote Jan. 17, the company’s two year, $60 million carbon capture technology deal with Exxon Mobil (NYSE:XOM) is the main catalyst behind recent moves. But the sharp rise in stocks like Tesla (NASDAQ:TSLA), Nio (NYSE:NIO), and Plug Power (NASDAQ:PLUG) could also be a factor.
The energy technology space is red hot. Investors are bidding up anything that offers an alternative to the energy status quo. Whether this is shrewd investors getting in early, or foolish speculators getting in too late, only time will tell. But what about FCEL stock? Can the rebound continue, or will shares crash back to prior levels?
With the recent Exxon Mobil deal, Fuel Cell clearly has the opportunity to build up its business. On the other hand, the company has many negative factors at play. Going long or short FCEL stock is merely a matter of “predicting the unpredictable.”
Let’s dive in and see why the smart play may be to avoid FCEL stock completely.
FCEL Stock Could Be Limited by Financing Issues
What could make FCEL stock reach new highs? Subsequent carbon capture technology deals with energy companies. Getting a sign-on from Exxon Mobil is a step in the right direction. It shows Fuel Cell may finally be ready for prime time.
It doesn’t matter if this potential is already priced into shares. Speculators could bid up FCEL stock higher, if another major company signs on with Fuel Cell Energy. But what about long-term? Can these headline-worthy deals translate into profits?
A key issue is capitalization. There’s a reason why FCEL stock has a 52-week trading range of 13 cents to $11.28. In mid 2019, Fuel Cell Energy flirted with bankruptcy. But, with a recent $200 million financing deal with Orion Energy Partners, bankruptcy is less of a risk.
Yet avoiding Chapter 11 came at a cost. As part of the deal, Orion Energy received warrants to buy 20 million shares of FCEL stock. These warrants came with a strike price far below today’s trading levels. However, with 194 million outstanding shares before the transaction, this is a relatively low dilution hit.
A bigger issue for Fuel Cell stock is not dilution, but imposed limits on dilution. Fuel Cell only has authorization to issue up to 225 million shares. At last year’s annual meeting, shareholders rejected expanding that limit to 335 million shares. However, on the heels of the Exxon Mobil deal, perhaps shareholders will be happy to dilute in the name of growth.
With this in mind, FCEL differs from Plug Power. As I’ve previously discussed, Plug Power has few roadblocks in terms of diluting shareholders to grow its business. While dilution is not great for shareholders, for speculative growth companies, it’s the cost of doing business. It may be a paradox, but Fuel Cell’s inability to dilute could send shares lower.
Reasons Why Fuel Cell Energy Stock Could Go Lower
Financing is not the only threat to FCEL stock. As this Seeking Alpha contributor recently discussed, Fuel Cell Energy offers investors a myriad of downside risks. That’s on top of negative gross margins and continued cash burn. In short, a perfect storm of downside.
But based on the valuation of FCEL stock, investors (or should I say, speculators) don’t seem concerned. Shares currently trade an an enterprise value/sales (EV/Sales) ratio of 9.1. This is even a premium to high-flyer Plug Power’s EV/Sales ratio of 8.2.
FCEL stock may have sold off about 40% from its recent high around $3/share. Yet, shares could fall further. It may not happen until the speculators have left the building. But long-term, Fuel Cell is not a slam-dunk growth play.
Bottom Line: Odds Are Against FCEL Stock
With FCEL stock, all bets are off. If the company can make more Exxon Mobil-type deals, expect shares to move even higher. Even then, long-term, the company may lack the financing to deliver. To scale up, Fuel Cell Energy needs the ability to issue more stock. Until then, the dilution it needs to grow is off the table.
Add in a variety of negative factors, and shares could easily tumble back below $1/share. Does that mean go short FCEL? Watch out in this market! As seen with stocks like Nio, bad fundamentals does not mean shares can’t rally higher on speculation alone.
The smart move? Don’t try to play Fuel Cell stock. Look for less volatile opportunities elsewhere.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
