As the world gradually transitions toward cleaner energy, there is increased focus on hydrogen fuel. In particular, with new studies showing that cost-effective hydrogen fuel can be produced in the coming years. The International Energy Agency believes “that the cost of producing hydrogen from renewable electricity could fall 30% by 2030 as a result of declining costs of renewables and the scaling up of hydrogen production.” It’s therefore not surprising that hydrogen stocks have surged in the last few quarters.
Even as hydrogen fuel competes with other cleaner energy sources like solar and wind energy, there is ample scope for growth.
To put things into perspective, hydrogen generation market value is expected to reach $160 billion by fiscal year 2026. The industry is therefore expected to grow at a CAGR of 6% in the next six years.
This column will discuss three hydrogen stocks that rose sharply in the last one year. These stocks might witness some profit booking, but are worth keeping in the investment radar.
Let’s take a deeper look into the following names:
3 Hydrogen Stocks: Plug Power (PLUG)
PLUG stock has gone ballistic having surged by 165% in the last six months. Its likely that there is some profit booking after the big rally. The stock can be kept in the radar with a close eye on business developments.
Recently, Plug Power completed the acquisition of United Hydrogen and Giner ELX as a part of its growth and vertical integration strategy. With this acquisition, the company revised the top-line guidance for FY2024 to $1.2 billion.
For the same year, the company expects adjusted EBITDA of $250 million. Potential expansion in Europe can be a game changer in the coming years. PLUG stock has been trending higher reacting to this news.
However, its worth noting that for the first six months of 2020, the company reported an operating level loss of $52.3 million. Operating losses have increased as compared to the prior year comparable period.
It remains to be seen if the company can deliver positive EBITDA on a consistent basis in the coming quarters. Accelerating cash burn can imply further equity dilution for expansion activities. Therefore, it makes sense to be cautiously optimistic on the stock.
FuelCell Energy (FCEL)
If we consider a one-year time-frame, FCEL stock has skyrocketed by 759% and currently trades at about $2.78. While there might be reasons to be optimistic about hydrogen fuel, the stock upside indicates a near-term bubble in the sector. I would therefore recommend caution at these levels.
As an overview, the company has a technology that converts chemical energy from hydrogen-rich fuels into electrical power and high-quality heat. For the second quarter of 2020, the company reported robust top-line growth of 105% on a year-on-year basis to $18.9 million. Further, the company has an order backlog of $1.34 billion, which provides revenue visibility for the coming years.
On the flip-side, the company still remains at a loss at the adjusted EBITDA level. Furthermore, the company boasts of big clients that include the likes of Pfizer (NYSE:PFE), Exxon Mobil (NYSE:XOM) and Total SE (NYSE:TOT).
However, business scalability is a concern. Even with big clients, the revenue base remains low. In addition, the backlog of $1.34 billion is executable over a period of 20 years. Therefore, the annual revenue contribution from the backlog might be muted.
I would also add that if EBITDA levels losses are sustained, cash burn would imply equity dilution in the coming years. Of course, hydrogen fuel has long-term potential, but is makes sense to remain cautious on FCEL stock after the big surge.
Ballard Power Systems (BLDP)
With the surge in hydrogen stocks, BLDP stock has not been far behind. The stock has moved higher by 231% in the last one year.
As a positive, the company ended Q2 2020 with a robust cash buffer of $170.3 million. In addition, the Weichai-Ballard joint venture commenced production activities and assembly of fuel cell stacks and modules. This can trigger long-term top-line growth. Besides the U.S. and China, the company has also been targeting Europe for expansion. As geographical reach expands, there is scope for accelerating revenue and EBITDA growth.
Among the concerns, the company continues to report losses at the EBITDA level. Further, with multiple expansion programs, operating cost is likely to remain high in the coming quarters. It remains to be seen if Ballard Power System would need to dilute equity.
Further, the company’s order backlog was $169.4 million for Q1 2020. By the end of Q2 2020, the backlog had declined to 155.5%. Considering the industry growth outlook, it would be encouraging to see the backlog grow on a sustained basis.
Overall, BLDP has expansion plans in major geographies. If hydrogen fuel is more widely accepted in the coming years, there is big potential for growth. However, I would book some profits in the near term considering the big rally and keep the stock in the investing radar.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.