Disappointing fourth quarter results sent shares of FuelCell Energy (NASDAQ:FCEL) plummeting — but only briefly. In February, FCEL stock recovered its post-earnings losses, and briefly challenged recent highs.
The rally admittedly makes some sense. A single quarter’s earnings aren’t necessarily that material for FuelCell Energy, which is embarking on a multi-year plan for growth.
Meanwhile, other stocks in the space are soaring. Plug Power (NASDAQ:PLUG), whose own turnaround is a template for that of FuelCell Energy, is up a sharp 81% so far this year. Meanwhile Bloom Energy (NYSE:BE) has gained 88%. Alternative fuels are clearly hot right now, though the three names were falling in midday trading on Thursday (February 20) prior to a wider downturn in the market over the weekend.
Short-term moves aside, it does look like the rally in FCEL stock is a little too buoyant. FuelCell Energy had an unquestionably great 2019, and has at least a chance at driving growth over the long-term. Still, investors can’t ignore key concerns facing shares at the moment.
Another ‘Hot’ Sector?
Even before this year, fuel cell names had posted impressive rallies. According to a screen run on finviz.com, in fact, FCEL has had the biggest recent rally of any stock. Shares have jumped 1,820% from their 52-week low — the largest move among over 7,000 stocks.
BE and PLUG aren’t far behind. At Wednesday’s close, they’d gained 433% and 259%, respectively. Bloom’s rally ranks 45th in the entire market. Plug Power comes in at 116th.
Yet it’s difficult to tell exactly what has changed for the sector as a whole. To be sure, each individual company has good news. I’ve recommended PLUG stock more than once, as its management inspires confidence in its long-term potential. Bloom’s story, too, has improved.
FuelCell Energy itself seemed headed for a restructuring last year, but an agreement with Exxon Mobil (NYSE:XOM) brightened the fundamental outlook as a new credit facility strengthened its balance sheet.
On an individual basis, the gains for the group in 2019 made some sense. In 2020 however, the rallies seem to be getting to be a bit much. PLUG stock, for instance, increasingly is pricing in success for its five-year plan. Bloom Energy announced that it would restate earnings going back years and yet stock prices improbably rallied on the news.
The parabolic gains of late look a bit like blockchain stocks in late 2017 to early 2018, or cannabis stocks from 2018 into early 2019. Neither of those stories ended well for long-term investors.
Admittedly, fuel cell stocks may not follow the same trajectory. There’s certainly more of a realistic bull case for these names than there was for Eastman Kodak (NYSE:KODK) or Riot Blockchain (NASDAQ:RIOT) fourteen months ago. But there are signs of exuberance, if not quite a bubble, among the three major fuel cell plays.
Don’t Ignore Earnings
Meanwhile, the sell-off following fourth quarter earnings last month had some real drivers. There are meaningful concerns in the report.
A 38% decline in revenue year-over-year isn’t quite what it seems. FuelCell Energy, under new chief executive officer Jason Few, has looked to drive longer-term PPA (Power Purchase Agreement) revenues, instead of short-term product sales. An increased Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss too isn’t surprising in that context.
But two write-downs in the quarter shouldn’t just be ignored. FuelCell Energy took a $14.4 million charge for its Triangle Street Project due to the inability to find a PPA partner. The company appears to have canceled its work at Campbell Soup (NYSE:CPB) subsidiary Bolthouse Farms, triggering a $3 million-plus charge.
These both were supposed to be reasonably big,and profitable efforts from FuelCell Energy. The write-downs suggest they won’t be.
Meanwhile, the company is embroiled in a legal disupte with South Korea’s POSCO Energy, an affiliate of that country’s steel giant POSCO (NYSE:PKX). That dispute isn’t necessarily new, but it creates a potential impediment for growth in Asia. And international markets are a key long-term opportunity.
From a broad standpoint, FuelCell’s Q4 stands out notably from Plug Power’s recent results, including preliminary numbers for its fourth quarter. Whatever an investor thinks of the valuation of Plug Power stock, it can’t be denied that the company looks notably better. Revenue is growing, execution is improving, and a serial disappointment is finally hitting its targets.
FuelCell’s Q4 does not give me the same sense of optimism. 2019 developments unquestionably changed the story, and I’m not sure it’s improved since then.
FCEL Stock and Its 50-Year History
Finally, there’s something important to remember about FuelCell Energy in the context of the optimism toward alternative fuels plays. The company was founded in 1969.
This is not a startup, or an early-stage company. It’s not, at least not at the moment, even a growth stock. Revenue declined 32% in 2019. Adjusted EBITDA rose just 4% thanks to cost-cutting.
And yet the company, in its 51st year of operation, is launching yet another “new business strategy.” At what point does the use of fuel cells for power generation simply become a pipe dream, or something close? After all, FuelCell Energy now has an accumulated deficit over $1 billion.
To be sure, the rise of PLUG stock shows that investors perhaps shouldn’t write off a company just because of its history. Tesla (NASDAQ:TSLA), in fact, offers another example, given its nearly 20-year history of full-year losses (excluding adjustments).
But those companies at least are delivering revenue growth (if inconsistently) and profitability on some basis at some point now or in the near future. In contrast, FuelCell Energy is hoping for Adjusted EBITDA profitability by 2022.
Again, the gains in 2019 made sense, particularly given that FuelCell looked potentially headed for a restructuring less than a year ago. But the news in 2020 simply hasn’t been all that positive. Yet FCEL stock has rallied over 60% just since the beginning of February.
As I wrote earlier this year, it’s possible that FCEL will follow the path of PLUG. But it’s at least equally possible, given its history and the concerns in the Q4 report, that it won’t. Investors right now seem to be focusing on only the potential rewards — and minimizing the still-real risks.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.