The renewable energy space has been robust, as seen with operators like Tesla (NASDAQ:TSLA) and Plug Power (NASDAQ:PLUG). Yet investors should be cautious. There are some companies that look particularly vulnerable, such as FuelCell Energy (NASDAQ:FCEL).
Let’s face it, FuelCell shares have been on a roller coaster. For the past 12 months, the range on FCEL stock has been 13 cents to $7.
It’s true that the company does have some notable positives. On a high level, there clearly is a secular trend towards more sustainable sources of energy. According to Grand View Research, the fuel cell market is forecasted to hit $33 billion by 2027, which would mean an annual growth rate of 15.5%.
As for FCEL, the company has actually been working on its own solutions since the late 1960s. Its fuel cells involve the combination of hydrogen and oxygen by using chemical membranes. The waste is just water, but there are a myriad of other advantages. They include less time for recharging, higher power and reduced storage requirements.
And yes, FCEL has been getting some traction with customers lately. The most notable is Exxon Mobil (NYSE:XOM), which represents a big-time validator and a testament to the leadership of CEO Jason Few. The multi-year contract will certainly move the needle on the top line and bolster liquidity on the balance sheet.
Ironically enough, the XOM deal points to a vulnerability for FCEL – that is, the reliance on mega deals. For the most part, the sales are for large systems, often to utilities. Unfortunately, the sales cycles are long, which results in choppy revenues (in 2019, they were down by about a third). There are also the risks of delays because of the complexities of the projects.
The latest earnings report does point out some of the risks to FCEL stock. The company wrote off $14.4 million for its Triangle Street Project (there was no partner that saw the ROI potential) and there was another charge for the Bolthouse Farms project, which is a subsidiary of Campbell Soup (NYSE:CPB).
According to InvestorPlace’s Luke Lango:
At the current moment, there’s a lot of uncertainty in the FuelCell growth narrative. The company just reported awful fourth-quarter numbers, and the order backlog here is much smaller than many had anticipated. That implies that 2020 numbers may not be much better than the bad 2019 numbers.
Bottom Line on FCEL Stock
I’m bullish on the long-term prospects for renewable energy. Companies and consumers want more sustainable options. Yet investors need to be selective. Even with the growth in the market, there could be lower adoption rates in certain areas. And I think this is the main problem with FCEL stock. Keep in mind that there is not much evidence that there is a groundswell of demand.
This is in contrast to, say, PLUG. The company has been smart to focus on the forklift market that tends to be easier to sell into. And the market is massive. The result is that PLUG has been showing more durable growth.
And besides, regarding FCEL stock, the valuation is already baking in significant growth as the price-to-sales multiple is at a steep 6x. This is what you would see for a red-hot tech startup, not a capital-intensive energy company.
Thus, I would hold off for now on FCEL, until the valuation gets to more reasonable levels.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.