In recent weeks, shares of alternative energy stocks like FuelCell (NASDAQ:FCEL) have caught investors’ attention. Since the lows hit in March, FCEL stock is up about 155%. On June 10, the shares hit a 52-week high at $3.42. Now, they are hovering at $2.5.
The Connecticut-based renewable energy firm makes fuel-cell (FC) power plants that generate electricity through a chemical process. A fuel cell is “an electrochemical power source which converts chemical energy in the form of fuel directly into electrical energy.” Almost any portable device or machine that uses batteries can also be powered by fuel cells.
According to recent research led by Suat Sevencan of KTH Royal Institute of Technology in Sweden, “The International Energy Agency identifies FC-based distributed generation as an important technology that may provide security against power outages.”
The importance of clean energy globally will continue to grow during this decade. And in the past few months, investors are likely to have found the cheap FCEL share price potentially alluring.
Yet, the company faces critical fundamental issues as the business cannot generate positive cash flow or does not have a clear path to profitability. Thus I’d not be willing to commit new capital into FCEL stock, based on the long-term potential which may not yet materialize.
Q2 Earnings and FCEL Stock
On June 12, the group released second-quarter results when it reported better-than-expected revenue. The firm’s revenue was $18.9 million, compared to $9.2 million a year ago.
Investors cheered that revenue, which beat forecasts. 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 reported revenue in three main segments:
- Generation — 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.
The company relies on Exxon as its most important customer. In 2019, the two firms decided to collaborate on developing technology to capture carbon dioxide from industrial facilities. The most recent quarterly results showed that the partnership contributed heavily to the revenue.
Before the release of the results, FCEL stock was around $2.5. Since then, it has gyrated between $2 and $3.35. Now it is around $2.5. Put another way, over the past seven weeks, it is flat.
Lack of Profits Means Difficulty for FCEL
Over the past several months, markets have been buoyed by optimism that we’ll have a V-shaped economic recovery. And the rising tide has helped a broad range of shares, including FCEL stock. Many investors seem to have put valuations and fundamental metrics on the side, at least for now.
At present, 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.
If you’re interested in buying the shares, I’d urge you to read FuelCell’s most recent 10-Q filing with the SEC. Management 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.”
FuelCell’s metrics become even more problematic when one remembers how it is reliant on one major client, i.e., Exxon Mobil. In case there were issues with the current partnership structure, then the group would lose a major source of revenue. As a result, FCEL stock would suffer greatly.
The Bottom Line on FCEL Stock
I believe FuelCell stock remains a risky bet. 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. It almost went bankrupt last year.
Long-term investors need a reliable story to stay interested in a company. Before hitting the ‘buy’ button in FCEL, I’d like to see how results may come in the next several quarters. Although Q2 was not a bad quarter, especially from a revenue-perspective, one report does not make a trend. If the numbers continue to show large operational losses and massive cash outflows, I’d stay away from FCEL stock.
Current shareholders can protect some of their paper profits with a covered call strategy. For example, September 18-expiry ATM 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, expected next September.
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, including a Ph.D. degree, 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 did not hold a position in any of the aforementioned securities.