Readers of mine know that I’m very bullish on clean energy stocks, since I see the world in 2030 as one being populated with electric vehicles, hydrogen fuel cells and hydrogen/wind/solar power.  But one obscure, small clean energy stock which I haven’t rung the bull horn on is FuelCell Energy (NASDAQ:FCEL). That’s because in my opinion, FCEL stock is a bubble that should be avoided at current levels.

Remember, I’ve consistently pounded on the table on so many big and small clean energy stocks, like Tesla (NASDAQ:TSLA), NIO (NYSE:NIO), Kandi (NASDAQ:KNDI), Arcimoto (NASDAQ:FUV), Plug Power (NASDAQ:PLUG), so on and so forth. But FuelCell is all hype.

There’s a lot of investor demand right now for clean energy stocks, mostly because the market is starting to see the future I see, wherein clean energy becomes ubiquitously adopted across various end-market verticals by 2030.

Most of the favorite household clean energy names — like Tesla — have been bid up to huge valuations. So, as opposed to chasing those names, many investors are looking for exposure to the clean energy revolution through smaller, more obscure clean energy stocks.

Some of these smaller stocks — like Plug Power — are absolutely worth it, because they are supported by robust fundamentals, which pave a path for huge long-term profit growth.

Some of these smaller stocks, though, aren’t worth it, because they are not supported by robust fundamentals and have rather weak long-term profit growth prospects.

FCEL stock finds itself in this second category.

A Closer Look at FCEL Stock

So, once the general market hype surrounding clean energy stocks fades and investors become more selective in the names they own, you could see hyped-up FCEL stock collapse.

Don’t get me wrong. FCEL stock isn’t all bad. Indeed, the FuelCell growth narrative is, ostensibly, quite promising.

The shift away from dirty, polluting legacy energy generation – such as coal and natural gas – and toward zero-emission, clean energy generation – such as wind, hydrogen and solar – is underway.

Domestically, legacy coal and natural gas energy generation peaked in 2007 at roughly 2.9 trillion kilowatt hours. Since then, it’s decreased by 13% to 2.5 trillion kilowatt hours. At the same time, renewable energy generation has increased by more than 100% over that stretch, from 353 kilowatt hours in 2007, to 720 kilowatt hours in 2019.

Still, at 720 kilowatt hours, renewable energy generation in the U.S. represents just 17% of total energy generation. That share is bound to expand to 20%, 30%, 40% and higher over the next 10-plus years as both the public and private sectors attempt to reduce their carbon footprints. That implies huge growth potential for the clean energy generation space.

FuelCell finds itself smack dab in the middle of that space, with over 59 clean-energy HFC power plants across three continents. This includes a 6.5 megawatt plant at Pfizer‘s (NYSE:PFE) R&D facility in Groton, Connecticut.

The simple idea is that as the clean energy revolution accelerates throughout the 2020s, FuelCell will win a lot more power generation contracts and become a sizable player in the market.

Supporting this bull thesis is the rationale that FuelCell is a leader in HFC power generation. This is a unique vertical that is highly flexible and reliable (unlike solar or wind, it does not depend on external factors in order to produce energy, and therefore, storage is not a problem).

All in all, it is quite likely that FuelCell is on the cusp of huge growth over the next decade.

Small Market and Slim Margins

Despite those favorable growth prospects, FuelCell’s long-term profit growth prospects are hampered by a few things.

First, HFC power generation is and will remain niche. Fuel cells accounted for just 810,000 megawatt hours of energy generation in 2016. That represents 0.02% of the total energy generation market in the U.S.

Part of the reason for this niche adoption is that HFC power plants aren’t truly zero-emission. They still produce a lot of carbon dioxide. A new technology called carbon capture could help this problem. But for FuelCell, this technology remains in the concept and testing phase.

The other reason is that cleaner energy generation sources – like solar and wind – are starting to develop their own storage techniques, thereby eroding the reliability advantage of HFC power.

Thus, for the foreseeable future, FuelCell projects to remain relatively niche, even in a world where clean energy generation is everywhere.

Second, FuelCell’s profit margins are scant. Gross margins have hovered between negative territory and 7% over the past few years. Management has hinted at the fact that 15% to 20% is the highest gross margins could ever get at scale.

That’s not very high, meaning that net profit margins won’t ever be that big, either.

Overall, scant profits margins on niche market growth prospects imply limited profit production potential in the long run for FuelCell.

Not Enough Growth for FuelCell Stock

The problem with FuelCell stock is that shares aren’t priced for limited profit production.

My model on the HFC power company is pretty aggressive. I’m calling for revenue to grow by nearly 10-fold to $500 million by 2030. That’s huge growth.

But it’s still not enough growth to warrant the current FCEL stock price at $3.

A 20% gross margin on $500 million in revenue, plus a $50 million opex base, gets you to just $50 million in operating profits. Take out $10 million in financing costs. Take out 20% for taxes. You’re left with just $32 million in net profits.

Throw a utility sector-average 18-times forward multiple on that. You’re talking about a potential 2029 valuation for FuelCell of less than $600 million. At $3 on FCEL stock, the market is valuing FuelCell at $600 million today. 

But the fundamentals say it won’t be worth $600 million for another nine years.

Bottom Line on FCEL Stock

I’m about as bullish as anyone on the clean energy revolution and high-quality clean energy stocks.

But I’m very cautious on FCEL stock.

Not because FuelCell Energy can’t craft out a niche for itself in the power generation market over the next 10 years. The company can.

Rather, because the company’s small addressable market and slim profit margins imply limited profit production potential in the long run, and limited profit production potential isn’t priced into FCEL stock today.