Since the lows hit in March, renewable energy firm FuelCell (NASDAQ:FCEL) stock is up about 145%. FuelCell stock is currently trading at levels not seen since April 2019.
The company makes fuel-cell power plants that generate electricity through a chemical process. On June 12, the group released second-quarter results when it reported better-than-expected revenue. Now investors are wondering if the company should belong in a long-term portfolio.
I believe FuelCell stock remains a risky bet as the business cannot generate positive cash flow or has a clear path to profitability. Let’s take a closer look.
FuelCell Earnings at a Glance
A fuel cell is “an electro-chemical power source which converts chemical energy in the form of fuel directly into electrical energy.” And almost any portable device or machine that uses batteries can also be powered by fuel cells.
The Danbury, Connecticut-based firm’s revenue was $18.9 million, compared to $9.2 million a year ago. Investors cheered that revenue, which beat forecasts, more than doubled year over year.
Net loss came at $14.8 million, or 7 cents a share, compared with a loss of $22.9 million, or $2.06 a share, in the year-earlier period. The loss was in line with analysts’ expectations.
FuelCell reports revenue in three main segments:
- Generatio — revenues went up by 184% to $4.6 million from $1.6 million, primarily benefiting from additional revenue associated with the Bridgeport Fuel Cell Project.
- Advanced technologies — contract revenues increased by 46% to $7.3 million from $5 million due to the addition of the Joint Development Agreement with ExxonMobil (NYSE:XOM) Research and Engineering Company.
- Service and license — revenues increased by 168% to $7 million from $2.6 million primarily due to revenue from module replacements under customer service agreements.
Chief Executive Jason Few said, “we continued to execute against our project pipeline and advanced our work with ExxonMobil Research and Engineering Company in pursuit of commercializing our proprietary carbon capture solution.”
InvestorPlace’s Larry Ramer has recently written in depth about how FuelCell relies on Exxon as its most important customer. In 2019, the two companies agreed to collaborate on developing a technology to capture carbon dioxide from industrial facilities. And the most recent quarterly results showed that the partnership contributed heavily to the revenue.
Following the results, FuelCell stock was up around 7% the next day.
Lack of Profits Means Headwinds for FuelCell Stock
According to recent research led by Iain Staffell of the Centre for Environmental Policy at Imperial College in London, “hydrogen and fuel cell technologies offer greater personal choice in the transition to a low-carbon economy, given their similar performance, operation and consumer experience to fossil-fueled technologies.”
Yet there is debate on why fuel cell power plants are not currently playing an increased role in a new world that relies less on traditional sources of energy generation. A big part of this debate centers around costs. A recent National Geographic article sums up, “The biggest hurdle for fuel cells today is cost. Fuel cells cannot yet compete economically with more traditional energy technologies, though rapid technical advances are being made.”
FuelCell’s history back to the 1960s. However, long-term investors in FuelCell stock would well know that this business has not reported profits in decades.
Part of the reason for continued losses is that on a cost basis, its fuel cells cannot compete with traditional energy sources like natural gas. And in 2019 high costs and lack of profits drove FuelCell close to bankruptcy.
FuelCell’s most recent 10-Q filing with the SEC gives even more reasons for concern. In it, the company says:
“We expect to continue to incur net losses and generate negative cash flows until we can produce sufficient revenues and margins to cover our costs. We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.”
The cost structure becomes even more problematic when one remembers how FuelCell is reliant on one major client, i.e., Exxon Mobil. In case there were issues with the current partnership structure, then FuelCell would lose a major source of revenue. And that is worrisome.
Investor Takeaway on FCEL
It’d be hard to argue with the growing importance of clean energy globally. And in the past few months, many market participants are likely to have found FuelCell stock alluring. Yet, the company faces critical fundamental issues. Its revenue is over-reliant on Exxon. And it simply cannot generate profits. Management does not even believe it may become profitable in the future.
Long-term investors need a reliable story to stay interested in a company. Before committing any capital into FuelCell stock, I’d like to see how results may come in the next several quarters.
Current shareholders can protect some of their paper profits with a covered call strategy. For example, July 17 expiry ATM (or slightly ITM) calls would decrease portfolio volatility and offer investors some downside protection. It’d also enable investors to participate in a potential up move following the earnings release.
At this point, FuelCell stock remains a risky bet for long-term investors. What has gone up so fast in recent months may end up coming down again.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
