Holding steady under $2/share, you might think now the time to buy into FuelCell Energy (NASDAQ:FCEL).
But not so fast! “Green Economy” stocks may be holding their value even in today’s volatile market. But in the case of FuelCell Energy, there are too many red flags to consider it an opportunity.
Like Plug Power (NASDAQ:PLUG), FuelCell is making progress signing up big companies for its renewable energy technology. As you may know, I’ve long been skeptical of Plug Power’s long term prospects.
In the case of FCEL stock, I am even more hesitant. FuelCell has even more limited financing options. Shares also trade at a higher enterprise value/sales (EV/Sales) ratio than Plug Power.
In short, FCEL stock is not the strongest “green wave” stock for your portfolio. Yet, the stock’s volatility may make it tough to get on the other side of this name. With this in mind, let’s dive in, and see what’s the verdict with FuelCell Energy stock.
What Else is in the Pipeline For FCEL Stock?
A big catalyst for FCEL stock as of late was the company’s partnership deal with Exxon Mobil (NYSE:XOM). This deal not only demonstrates potential demand for FuelCell’s carbon capture technology. It could also help the floundering company get its financial house in order. As InvestorPlace’s Chris Lau discussed February 26, this deal helps reduce operational risks. With this partnership, Exxon Mobil is essentially subsidizing FuelCell’s research and development costs.
But, what else is at play with FCEL stock? As InvestorPlace’s Vince Martin discussed February 24, FuelCell’s new strategy is to focus on long-term PPA (or Power Purchase Agreement) deals, as opposed to one-time product sales. This may explain why sales took a hit in the last quarter of 2019. Yet, outside of the Exxon Mobil deal, FuelCell lacks other game-changing catalysts.
All bets are off whether FuelCell can secure more Exxon Mobil-sized deals. Yet, that has not stopped investors from continuing to give FCEL stock a rich valuation. Add in potential headwinds related to financing, and there’s more to be cautious about with FuelCell Energy shares.
Financing Challenges Could Limit FuelCell’s Growth
In my prior analysis of FCEL stock, I keyed in on the company’s financing issues. Much of the attention may be paid to the company’s $200 million financing deal with Orion Energy Partners. But, the company could be hitting a wall raising more capital.
FuelCell was able to secure the deal by issuing warrants. The deal wasn’t terribly dilutive. But unlike other speculative growth names, FuelCell can only dilute so far. Why? The company’s self-imposed cap of 225 million outstanding shares. With the Orion deal, FCEL stock now has about 211 million shares outstanding.
With the company unprofitable, FuelCell will need more financing if it manages to secure needle-moving sales. To secure this funding, odds are the company will need to issue warrants to entice potential debt investors. As the company currently can only issue an extra 14 million shares, this will be a challenge.
This explains why FuelCell’s next annual meeting includes a vote on expanding the share count. If approved, the company could increase the number of outstanding FCEL stock to 337.5 million shares.
Last year, shareholders voted against this amendment. But, this year, FuelCell’s management could make a stronger case. Issuing more FCEL stock would impact the share price short-term. But, the company cannot pursue growth without more capital.
Valuation Another Key Concern with FCEL Stock
With potential growth limited by the outstanding shares cap, one would think FCEL stock would sell at a lower valuation than Plug Power. Yet, this is not the case. FCEL shares trade at an EV/Sales ratio of 9.6. Plug Power trades at an EV/Sales ratio of 8.8. And this is with Plug Power, overvalued at it may be, having stronger prospects than FuelCell.
Granted, this valuation discrepancy may not matter in the grand scheme of things. If FuelCell can secure another headline-making deal, shares could skyrocket. It’s tough to use traditional valuation metrics for stocks like Fuel Cell or Plug Power. Less than a year ago, Plug Power didn’t look like a great opportunity valuation-wise. Yet, shares have more than doubled since then.
FuelCell Shares Could Surprise, But Look Elsewhere For Opportunity
Given the number of factors working against FCEL stock, it’s tough to justify at buy at today’s price levels. Yet, it may be precarious to short FuelCell around $2/share. With speculative interest in green stocks like FuelCell, shares could skyrocket on the whiff of a game-changing deal.
It short, FCEL stock is too overvalued to buy, but too uncertain to short. Bottom line, the best move is to seek opportunities elsewhere. Renewable energy stocks as a whole are overvalued. But FuelCell shares offer an even less promising proposition.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
