FuelCell Energy (NASDAQ:FCEL) is an interesting company but a speculative stock. The shares have been climbing out of the market’s basement since last summer, on the strength of its business with utilities.
FCEL systems, sold under the name SureSource, help maintain baseload power and can run on biogas produced by wastewater treatment.
Fuel cells work by combining hydrogen with oxygen through chemical membranes to create energy with water as the waste product. Smaller fuel cells are used to power warehouse forklifts, but FCEL is not in that business.
Fuel cell companies are constantly seeking sustainable niches for a product that seems too good to be true. The problem has always been that the main source of hydrogen was natural gas, an unsustainable fossil fuel. FCEL claims it has solved that problem.
The Potential Is Big
Analysts are big on fuel cells. There are lots of “hockey stick graphs” being produced. These are graphs that show a slow-growing industry or company suddenly taking off 3-5 years down the road, producing a revenue chart that looks like a hockey stick.
One of the most popular of these charts, from Grand View Research, shows fuel cells as a $33 billion market in 2027, growing at 15.5% per year. There are several types of fuel cells. Demand is expected to be driven by the rise of unconventional power sources like solar, wind and biogas.
That’s what FuelCell is offering in Tulare, California. Gas from water treatment that was previously burned off is now being turned into energy that runs the plant. There’s a power purchase agreement with the local utility to buy the rest of the power, and a $14.4 million sale-leaseback deal to finance it.
Dicey Numbers
Deals like Tulare are why investors are willing to play penny poker with FCEL.
The stock’s market capitalization of $630 million supports trailing-year revenue of about $67.6 million, and there have never been profits. But whenever buyers come in, as they did Feb. 18, the stock draws headlines.
The expectation is for rapid growth. The company’s most recent earnings release, however, showed revenue of just $11 million, down 38% from a year earlier. But it arrived alongside another release touting a new strategy called “Powerhouse,” with former software executive Jason Few as CEO.
Few worked with management consultants Huron Consulting (NASDAQ:HURN) to turn many of its loans from Orion Energy Partners into stock, then closed a new $200 million lending facility with Orion. This should provide stability, as the company burned $40 million in cash in the fiscal year ending last October.
The Bottom Line on FCEL Stock
All this creative financing worries InvestorPlace’s Thomas Niel, who warns it could limit the stock’s growth opportunities.
That’s not an unusual take. Usually, when InvestorPlace writers look at FCEL, we turn our thumbs down on it.
Vince Martin put an optimistic headline on a recent story that nevertheless warned about past failures. Tom Taulli reminded readers that this was a 20-cent stock last June. He suggested those who got in then get out now.
Will Ashworth looked at FCEL in February and preferred Bloom Energy (NYSE:BE). David Moadel said you should avoid FCEL even if you’re bullish on renewable energy.
My own view remains what it was in January. FuelCell needs to show some big orders from utilities before I’m going to believe the Powerhouse strategy is going to work. I’m willing to forego speculative gains to buy into a sustainable business. I’m willing to wait for it.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
