Before the oil price plunge and the coronavirus crisis, FuelCell (NASDAQ:FCEL) had more than its fair share of problems, but now the outlook of FuelCell stock has gotten a lot worse.
As I detailed in previous columns, the company’s products lacked a comparative advantage, as they’re neither cheaper nor greener than solar and battery combinations. Further, the company was losing money, and there were no signs that its business would meaningfully improve anytime soon.
After the oil price plunge, major FuelCell customer Exxon Mobil (NYSE:XOM) could easily lower the amount of money it pays the struggling alternative-energy company. I’ve always believed that Exxon is paying FuelCell primarily to boost its environmental credentials, not because it’s really enthusiastic about FuelCell’s business.
As I noted previously, “XOM has invested in a variety of biofuels, and little or nothing seems to come from its efforts in that area. ”
At a time when Exxon may have to struggle to keep its dividend and its exploration operations intact, it could very well tremendously cut the amount of money it’s devoting to its “virtue signaling” operation with FuelCell. That would be a big problem for FCEL stock.
The company indicated that, in the first quarter, the deal with Exxon generated the lion’s share of $5.2 million of sales that FuelCell labeled “Advanced technology contract revenues.” FuelCell’s total revenue in Q1 was $16.3 million. If Exxon paid FuelCell $5 million in Q1 and cuts that total by 50% in Q2, FuelCell’s overall revenue would sink by 30%, all else being equal.
State and Local Governments Are Struggling
In recent quarters, the other main source of FuelCell’s revenue has been local and state governments. For example, in Q1, the company obtained meaningful revenue from a power plant used by San Bernadino, Calif.
During the coronavirus outbreak, cities and states have had to spend a great deal of money dealing with the crisis. For example, EMTs need more supplies and cleaning at various facilities has had to be stepped up. Medicaid and unemployment costs have skyrocketed. And although the federal government is sending states and municipalities a lot of money, Washington is likely not going to come close to reimbursing all of their costs.
At the same time, states and municipalities are losing a great deal of revenue. After all, when there’s not too much for people to buy, sales tax revenue will definitely tumble. And when people aren’t working, they’re not going to be paying income taxes.
So in the current environment, it’s very likely that cash-strapped state and local governments will find creative ways to escape their contracts with FuelCell. And the company can forget about signing new deals with states and local governments for at least a year and probably much longer than that.
The Bottom Line on FCEL Stock
In Q1, FuelCell’s revenue sank 9% year-over-year. Its gross margin jumped to 20.2% from -12.4% during the same period a year earlier. But huge spending cuts appeared to have been responsible for the gross margin surge, and the company can only cut its costs so much. Moreover, despite the cost-cutting, it still reported a loss from operations of $4.1 million in Q1.
Given FuelCell’s lack of competitive advantage and its’ customers’ huge problems, investors should definitely cell FCEL stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer did not own shares of any of the aforementioned companies.