On Dec. 27, FuelCell Energy (NASDAQ:FCEL) announced the start of commercial operations at its 2.8-megawatt fuel cell project at a municipal wastewater facility in Tulare, California. FCEL stock has doubled since.
Frankly, I’m not too familiar with the provider of fuel-cell solutions. However, with a 530% gain over the past three months, I couldn’t help but take a closer look at FuelCell stock.
In early December, I recommended speculative investors take a look at Plug Power (NASDAQ:PLUG) under $3. Now trading 70 cents higher than the $3 mark, I thought I’d figure out which of the two fuel cell companies’ stocks is the better buy.
Please note, whichever stock I favor by the end of this article, these are both still very speculative investments. I do not recommend holding either of them in anything but a taxable account.
With that little housekeeping aside, here are my two cents on each company and stock.
FCEL Stock Is Ready to Move Higher
The company’s main product is the SureSource 1500, a 1.4-megawatt power solution that provides ultra-low emissions and is extremely quiet. It takes up the equivalent space of a tennis court. It’s the perfect source of on-site power for wastewater treatment plants, manufacturing facilities and other sites that require a 24/7 power source.
The fuel cell project in California is the company’s SureSource 3000, which is essentially two of the 1.4-megawatt modules combined. Its most significant fuel cell solution is the SureSource 4000, which is capable of producing 3.7 megawatts of ultra-clean power by converting unused fuel in the two 1.4 megawatt modules into electricity.
Even some of its biggest projects take up very little space. It’s got a 21-unit, 59-megawatt fuel cell park in South Korea that takes up a little more than five acres. That project allows the users of its power solutions more room to carry out their operations.
FuelCell’s New Business Model
The company has moved to an “energy as a service” model where it obtains a power purchase agreement (PPA) from a client for a period of 10-20 years. The client pays a fixed rate for the power received each year with an escalation clause to account for inflation. Then the client doesn’t have to come up with the capital to build the power source.
In the meantime, FuelCell can sell the project to an investor, who takes over the PPA, or it can hang on to the project and continue to generate revenue from the PPA for its coffers. The company began selling these stationary fuel cell power plants in 2003.
It finished the third quarter with $2.1 billion in backlog and project awards. Through the first nine months of 2019, its revenues were $49.7 million. Revenue was 31% less than in the same period a year ago.
However, because of the change in its business model, it generated a gross margin of 4.3%, 160 basis points higher than a year earlier.
Long term, its diversified revenue streams will generate profits for shareholders. The need for clean and affordable power isn’t going away.
Plug Power Has a Bigger Market Cap
The most appealing part of Plug Power stock is that it’s incredibly undervalued should the company hit its 2024 revenue target of $1 billion. It’s why I suggested speculative investors buy its stock under $3.
By comparison, Plug Power has trailing 12-month revenues of $192 million, almost three times Fuel Cell’s trailing 12-month revenues. Both, however, are losing money on a GAAP basis.
As InvestorPlace’s Luke Lango suggested in December, PLUG’s stock price fell off a cliff after selling 40 million shares to investors at $2.75 a share, well below $4 where it was trading at the end of November.
The company remains an excellent speculative bet on hydrogen fuel cell technology (HFC), becoming a go-to fuel source for car companies transitioning from fossil fuel to alternative fuel sources such as hydrogen.
It’s for this reason Lango sees PLUG possibly hitting $8 over the next several years, based on the $30-billion opportunity that already exists for fueling forklifts around the world. Add in automobiles, and it’s easy to see why he’s excited about Plug Power’s potential.
If you can handle the volatility, it’s hard to argue with his logic.
In 2008, when Plug Power CEO Andy Marsh took over, the company changed its focus from fuel cell research and development to selling HFCs for forklifts. Now, he wants to take it beyond the material handling industry.
Meanwhile, FuelCell hired Jason Few as CEO in August. He is tasked with continuing the company’s transformation and delivering on its $2.1-billion backlog.
Few, who has more than 30 years experience working for Fortune 500 companies, joined the company’s board in November 2018. He is very aware of FuelCell’s strengths, weaknesses, opportunities and threats.
If you’re a speculative investor and can afford to lose your entire bet, I’d bet on both of these stocks. The upside potential is tremendous.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.