FuelCell’s (NASDAQ:FCEL) stronger-than-expected second-quarter results have not made me more optimistic about the company’s overall outlook, and I continue to be bearish on FCEL stock.
Given the tremendous threats faced by the company and its lack of concrete strengths or opportunities, along with the recent weakness of alternative-fuel stocks, I recommend that both traders and longer-term investors avoid FuelCell.
Q2 Beat Was Driven by Old Projects
Speaking on FuelCell’s Q2 earnings conference call, CFO Michael Bush made it clear that the year-over-year doubling of the company’s revenue to $38 million was driven by increased fees from previously existing deals. Specifically, Bush said:
“The biggest contributor was revenue from service and license agreements, which increased by $4.4 million versus the prior year quarter to $7 million. The increase was driven by revenue recorded on module replacements under customer service agreements. … revenues from generation increased by $3 million to $4.6 million … primarily benefiting from additional revenue associated with the Bridgeport Fuel Cell Park project that we acquired in May of 2019.”
In other words, FuelCell’s revenue boost was primarily caused by existing customers buying more of its parts under the terms of previous deals. And the impact of a May 2019 acquisition also boosted its top and bottom lines.
It can be inferred that FuelCell’s results did not improve because of an innovative new product it started offering or because a change in its end markets caused demand for its existing offerings to suddenly surge. As a result, I don’t expect its top-line or bottom-line growth to radically accelerate in the coming quarters.
CEO Jason Few mentioned that the company is working on two new projects, one on Long Island and one in San Bernadino. But the Long Island deal was signed in 2018, while the San Bernadino transaction was announced in April 2019. Expected to generate 7.4 megawatts and 1.4 megawatts of electricity, respectively, the projects don’t sound like they will be blockbusters for FuelCell or FCEL stock.
FCEL Stock Is Still Facing Huge Threats
As I mentioned in a previous column, FuelCell could be badly hurt by the financial problems of its top customer, Exxon Mobil (NYSE:XOM), and by the steep budgetary problems of state and local governments.
Those threats do not seem poised to ease soon. Exxon recently reported weaker-than-expected Q2 results and is reportedly looking to sharply reduce its spending in order to maintain its dividend at its current level. Since Exxon’s partnership with FuelCell on the development of “carbon capture” technology is definitely not part of its core business and could be primarily a “virtue-signaling” endeavor, Exxon could very well look to cut back on the scope of the deal.
Meanwhile, state and local governments face mounting costs and reduced revenue due to the novel coronavirus pandemic. In an indication of just how badly the states are doing, even Texas, which is usually in better fiscal shape than most states, looks poised to have a $4.6 billion budgetary shortfall.
Meanwhile, Congress has been unable to reach a deal on a bill that could provide significant financial aid to states and cities. Given the budgetary problems of states and cities, FuelCell will probably have trouble making substantial new power deals in the U.S. for a long time.
Finally, the combination of solar and battery power continues to rise in popularity. For example, NV Energy, a utility, recently agreed to buy 200 megawatts of solar and 180 megawatts of battery power from Europe’s EDF. And two other, even larger projects are under way in California.
Meanwhile, despite the pandemic, the results of Tesla’s (NASDAQ:TSLA) solar and energy- storage business improved in Q2 versus Q1 and are expected to rebound further in the second half of the year. As far as I know, FuelCell has yet to explain how its offerings are superior to a combination of solar energy and batteries.
Near-Term Weakness and a Long-Term Opportunity
In the last few weeks, alternative energy stocks have been fairly weak. I think the lukewarm reaction of investors to Tesla’s Q2 results, along with the recent plunge of the shares of hydrogen-truck maker Nikola (NASDAQ:NKLA), are largely responsible for the weakness.
From July 13 to July 31, Tesla fell 19%, Plug Power lost 13%, Nikola tumbled 45%, and FuelCell sank 27%. Now is clearly an especially risky time to buy FCEL stock for traders.
Over the longer term, given the increased importance of electricity for transportation and more volatile weather which is leading to more frequent electrical outages, demand for FuelCell’s microgrids as a backup power source could increase.
However, the company will have to explain to investors and, more importantly, to end users why its microgrids are superior to generators and similar products from its competitors like Bloom Energy (NYSE:BE).
The Bottom Line on FCEL Stock
Despite the intense threats that FuelCell is facing and its lack of apparent competitive advantages and positive trends, the shares are trading at a fairly hefty trailing price-sales ratio of five. Meanwhile, alternative-fuel stocks have been sliding recently.
Given these points, investors should avoid FCEL stock.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry owned shares of Plug Power stock.
