It was back in late June that the shares of FuelCell Energy (NASDAQ:FCEL) sank below 20 cents a share. After all, the company was suffering from falling revenues and dwindling cash. It actually looked like FCEL stock could be wiped out with a possible bankruptcy filing.
But it was a false alarm. Keep in mind that FCEL stock has since been on a major bull move, with the price now at $2.50 and the market capitalization at $464 million.
So, what happened? And can the good times last?
Well, FuelCell has benefited from some recent deals. Perhaps the most important one was with ExxonMobil (NYSE:XOM), which signed an expanded joint venture for an additional two years. The goal: improve fuel cell technology so as to capture as much as 90% of carbon dioxide from industrial systems.
But this was not just a fancy press release. Note that the deal could be worth as much as $60 million. By comparison, FCEL’s latest quarterly revenues came to $22.7 million. In other words, the ExxonMobil deal should move the needle. But it is also a big-time validator and could lead to further partnerships and contracts.
Background on Fuel Cell Technology
It’s certainly been a long journey for FuelCell Energy, as the company was launched in 1969. The founders, Bernard Baker and Martin Klein, were pioneers of fuel cell technology. The focus was on creating advanced energy systems for the military and utilities.
No doubt, there are some clear advantages to fuel cells. Because they are cleaner (the main waste byproduct is water) and quieter, they tend to be a good fit for urban environments. Fuel cells also are more efficient than fossil-fuel systems.
But despite all this, fuel cell technology has had a tough time getting adoption. And yes, this has been a long-term drag on FCEL stock. During the past 15 years, the shares have posted an average annual return of -34.%.
True, when it comes to alternative energy sources, we may be reaching a tipping point. The costs have been steadily falling. There is also the huge success of companies like Tesla (NASDAQ:TSLA). Then there are companies like Microsoft (NASDAQ:MSFT) that are making commitments to reduce their carbon output.
However, this does not necessarily mean that FCEL stock will be a winner. If anything, the company still faces challenges. Note that the focus is on large projects, such as with its SureSource 1500 (it has 1.4-megawatts of power). This means that there are heavy capital costs, the sales cycles are generally long and there can be prolonged delays on projects, as seen with the Edison International (NYSE:EIX).
Bottom Line on FCEL Stock
After the run-up in the FCEL stock, the valuation is now far from cheap, with a seven-times price-to-sales multiple. Granted, growth is likely to accelerate. But the multiple is still rich for a company that has choppy revenues. Consider that the consensus price target from Wall Street analysts is a much more subdued 75 cents!
Here’s what InvestorPlace.com’s Vince Martin had to say: “The skeptical answer to any rally in pretty much any fuel cell stock is simple: we’ve been here before. Yes, there’s some good news, but there’s been good news plenty of times in the past. Investors have always ended up disappointed, and this time won’t be any different.”
Thus, while FCEL stock is certainly in much better shape, it’s still probably a good idea to hold off.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
