FuelCell Energy (NASDAQ:FCEL) is poised to drop much further, as the valuation of FCEL stock is high, even though the company’s outlook is quite dismal.
FuelCell recently reported poor fourth-quarter results, featuring a year-over-year revenue decline of 38%. But more importantly, there are multiple signs that the company’s strategy probably won’t succeed.
Specifically, FuelCell primarily is looking to generate revenue by selling electricity that its fuel cells generate. But there are indications that there is not very much demand for electricity generated by its fuel cells, as I hypothesized in a previous column.
In a filing last month with the SEC, FuelCell revealed that it was unable to conclude an “acceptable” deal to sell electricity generated by its Triangle Street Project in Connecticut. That probably means that no one was willing to pay enough for Triangle Street’s electricity to make the facility profitable for FuelCell.
For the next five years, the company will sell electricity at wholesale rates and obtain renewable energy credits that it can sell, but it had to take a $14.4 million impairment charge as a result of its failure to make a deal to sell the project’s electricity.
Electricity Sales and FCEL Stock
FuelCel indicated that it has so far been unable to make a deal to sell electricity generated by another one of its Connecticut plants, the Bridgeport Fuel Cell Project. The company acquired the plant in May 2019.
The company admitted that it was buying fuel for the plant and that it also was incurring service and administrative costs related to it. The company did not state that it was close to finding a buyer for the plant’s electricity.
Most alarmingly, FuelCell divulged that it would likely terminate an existing deal to sell electricity to California food manufacturer Bolthouse Farms because “recent regulatory changes” would make the project too expensive for FCEL and Bolthouse Farms.
The decision may indicate that many of FuelCell’s offerings will no longer be profitable in California. The idea that FCEL may be partially shut out of the nation’s largest alternative energy market certainly doesn’t bode well for FuelCell or FCEL stock.
FuelCell’s backlog, which primarily consists of deals to sell electricity over 20-year periods, came in at $1.32 billion, but the company indicated in November that its backlog may have exceeded $2 billion.
Although $1.32 billion may sound like a great deal of money, over a 20-year period, that works out to only about $65 million per year. Further, as shown by the cancellation of the Bolthouse Farms deal, not all of the agreements in FuelCell’s backlog are likely to last for 20 years.
FuelCell’s Strategy Changes Aren’t Encouraging
The company announced that it was launching a new “Powerhouse” strategy. But most of the elements of its strategy were either unspecific or did not relate to improving the company’s financial results. For example, it noted that it had borrowed $100 million and had appointed a new management team.
FCEL said it would pursue “operational excellence” by taking a “rigorous approach to project backlog execution and on-time, on-budget delivery” and “commercial excellence” by “build (ing) on customer relationships and extend(ing) our customer-centric reputation.”
It added that it would look to keep its costs low. But none of these points really specifically addresses how the company plans to turn itself around.
A long segment of the prepared remarks of FuelCell’s new CEO Jason Few, during the company’s recent earnings conference call dealt with the advantages of fuel cells for generating electricity. But Few did not address what I see as the proverbial “elephant in the room” question: What advantages do FuelCell’s products have over increasingly popular solar-and-storage offerings?
Few noted that fuel cells emit very little carbon dioxide and pollutants, but that’s also true of solar and storage solutions. He said that fuel cells make little noise and can produce energy continuously, but that’s also true of a combination of solar panels and batteries since the energy saved by the batteries can be released at any time.
The CEO said that fuel cells don’t take up much space, but solar panels are located on roofs which almost no businesses use for anything else, and batteries don’t take up much space.
The Bottom Line on FCEL Stock
The company is largely reliant on selling electricity from its plants, but there are indications that demand for its electricity is weak. Its Q4 results were dismal, and its strategy is uninspiring. Moreover, there’s still no indication that its products are superior in any way to solar-and-storage solutions.
With FCEL stock trading at nearly six times its 2019 sales, the shares should fall much further as investors realize that its business is losing traction. Investors are much better off buying Plug Power (NASDAQ:PLUG) or a solar energy company like JinkoSolar (NYSE:JKS) or SunPower (NASDAQ:SPWR)
As of this writing, the author owned shares of Plug Power, JinkoSolar, and SunPower.