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Why Doubts Remain About FuelCell Energy

FCEL stock continues to be far more difficult to handicap than some of its peers

It’s been almost six months since I recommended investors consider Bloom Energy (NYSE:BE) over FuelCell Energy (NASDAQ:FCEL). It’s not that I didn’t like FuelCell’s proprietary molten-carbonate fuel cell technology, because I do. At that time, I felt FCEL stock carried greater risk than Bloom.

Positive Financials Will Power FCEL Stock Soon Enough
Source: Kaca Skokanova/Shutterstock

Fast forward to Aug. 4, and FuelCell’s stock’s gained 24%, while Bloom’s stock rose 34% over the same period. While it’s always nice to know you’ve been right about a stock, both of these companies have issues that give me doubts about their long-term growth – FuelCell, more so than Bloom.

Here’s why I feel this way. 

FuelCell’s Profitability Still Out of Reach

As I stated in February, the fact that the company had an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $31.4 million in fiscal 2019, against sales of just $60.8 million, suggested FCEL stock wasn’t the best bet. This judgment came despite the potential of emerging fuel cell technologies.

In June, FuelCell reported better-than-expected Q2 2020 results, with sales doubling to $18.9 million, while its net loss dropped by 35% to $14.8 million. That looks like a win/win for investors.

However, FCEL still trades at 5.7 times sales compared to 2 times sales for Bloom Energy. So, barring some kind of miraculous turnaround in its profitability, FuelCell is more expensive from a valuation perspective. And investors have little incentive to jump in at current prices. 

InvestorPlace’s Tezcan Gecgil recently argued that FuelCell’s track record for generating profits is not good. 

“[L]ong-term investors in FuelCell stock would well know that this business has not reported profits in decades,” Gecgil stated July 28. “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.”

A Question of Momentum

Further, Gecgil points out that the company is overly reliant on its biggest client, Exxon Mobil (NYSE:XOM). Were Exxon to end the partnership, the lost revenues would severely affect its pathway to profitability.

In the first six months of 2020, FuelCell’s adjusted EBITDA was $3.5 million, much less than the $26.5 million adjusted EBITDA loss a year earlier. 

With FCEL stock up 30% year to date through Aug. 4, any loss of momentum will send its share price back below $2, where it traded for much of March and April. 

The company can’t afford to take a step backward in the second half of 2020 after delivering a very positive second quarter. It just can’t. 

Bloom’s CEO Misspoke

On July 28, Bloom Energy’s CEO, K.R. Sridhar, stated during the company’s Q2 2020 conference call that it had added NextEra Energy (NYSE:NEE) as a financing partner. Only NextEra Energy Resources CEO, John Ketchum, doesn’t see it that way. 

“Yesterday, during a call with financial analysts, an executive of Bloom Energy incorrectly asserted that NextEra Energy Resources was a ‘financing partner’ of Bloom Energy. We have no such relationship with Bloom Energy,” Ketchum stated in the company’s July 29 statement. 

“NextEra Energy Resources’ relationship with Bloom Energy is limited to a recently acquired small fuel cell with an existing power purchase agreement on Long Island, New York. The opportunity became available to us on attractive terms. Our contractual arrangement with Bloom Energy is limited to receiving operational and technology support for this one system. We have no plans to engage in further business activities with Bloom Energy.”

Talk about a smackdown. NextEra’s market capitalization is $138 billion, almost 70 times larger. Bloom, to its credit, stood its ground, suggesting that the comments on its conference call were “true and accurate in all respects.”

Like most disputes, I’m sure the truth is somewhere in the middle. 

Some Statistics to Consider

What’s important is that Bloom Energy, like FuelCell, reported Q2 2020 revenues and adjusted EBITDA above the consensus estimate. On the top line, revenues were $187.9 million, 19.9% higher than revenues in the first quarter. Its adjusted EBITDA was $2.1 million, a solid rebound from a $9.8 million loss in the first quarter.  

Further, the company’s acceptances during the second quarter, which are defined as being when an Energy Server (100 kilowatt systems) is installed and running at full power, were 306, 12.9% higher than a year earlier, and 19.5% higher than in the first quarter. 

In Mid-July, Bloom announced a partnership with an affiliate of SK Group, one of South Korea’s largest conglomerates. This partnership will see it sell hydrogen-powered fuel cells in the country, one of its first forays into the hydrogen-fuel market. 

The Bottom Line on FCEL Stock

Has anything changed since February? I don’t see enough from FuelCell’s growth to alter my view that its stock is riskier than Bloom. Not to mention more expensive. 

If you’re picking between the two, I’d go with Bloom. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/08/i-continue-to-have-my-doubts-about-fuelcell-energys-fcel-stock/.

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