The fuel cell sector reminds me of the risks that are inherent with emerging technologies. In the case of FuelCell Energy (NASDAQ:FCEL), investors can like what the company represents without paying as close attention to the fundamentals.
FCEL stock got a nice lift at the end of 2019 on news that the company had signed a two-year $60 million carbon capture deal with Exxon Mobil (NYSE:XOM). However, any bump the stock received was short lived. In January, FuelCell posted an earnings report that showed a disturbing lack of revenue.
The issue for FuelCell and other fuel cell stocks such as Bloom Power (NYSE:BL), Plug Power (NASDAQ:PLUG) and Ballard Power Systems (NASDAQ:BLDP) is this: no matter what deals they sign, they are operating in what remains a very small niche. And it’s tough to make money like that. Which is why many investors are concerned about the sustainability of FuelCell Energy.
Understand What You’re Investing In
FuelCell represents, in the abstract, a world less reliant on traditional fossil fuels. And there is growing momentum for the transition to clean energy, and particularly renewable energy, in the U.S. power sector.
Jeff Dennis, managing director and general counsel at Advanced Energy Economy (AEE) told the publication Utility Dive that the economics of renewable energy will continue to improve in 2020.
“We’re seeing time and again, whether it’s in planning processes that are conducted by utilities, whether it’s open solicitations in markets…that using combinations of wind, solar, and storage is more cost effective for customers than really any other options,” said Dennis, “including relying on existing aging coal assets or even building new natural gas assets.”
Here’s the problem. Investors frequently think of fuel-cell companies in the same category as renewable energy stocks. But that’s not (yet) an accurate portrayal of the FuelCell business model. The company’s fuel cells operate on natural gas or biogas. Even for hydrogen fuel cells, like those run by Plug Power typically rely on natural gas as their base fuel stock for lack of a widely available hydrogen infrastructure.
And fuel cells do not take the place of batteries for vehicles. Rather, they work in tandem. The fuel cells output electrons to a motor that will power the vehicles. This makes improved battery technology both a necessity and a competitor for fuel cells.
As its deal with ExxonMobil shows, Fuel Cell is growing in a few niche markets. But overall, the company’s revenue declined in the fourth quarter last year. And, without a mass market and a sector that faces some fundamental challenges, it’s hard to get excited about FuelCell stock.
FuelCell Is Running Out of Ways to Pay for Its Debt
As InvestorPlace’s Thomas Niel wrote, FuelCell has an issue with capitalization. In fact, as Niel wrote the company thought about bankruptcy in the middle of 2019. However, a $200 million bailout from Orion Energy Partners makes that look less likely. However, Orion now has warrants to buy 20 million shares of FCEL stock. Whether this will be an issue will depend on whether or not the stock can rise significantly from current levels.
However, as Neil writes, there is a larger issue for FCEL stock. Unlike Plug Power, the company has imposed a limit on the number of shares they can dilute. And although shareholders may reconsider this based on the ExxonMobil deal, it’s still far than an optimal solution for shareholders.
What’s Next for FCEL Stock?
Fuel cell technology remains an attractive sector because many of the stocks are cheap to buy. And FCEL stock does appear to be an active stock among traders who solely focus on the technical indicators.
However, as an investor, it’s tough to see FuelCell’s path to profit. With other ways to play the clean energy sector, I can’t recommend FCEL stock.
As of this writing, Chris Markoch did not have a position in any of the aforementioned securities.