The energy industry is slowly shifting to renewables. The change is gradual but inevitable, and several companies are leading the charge.
However, not every renewable energy source is in vogue. Hydrogen is a classic case study. Due to the popularity of wind and solar energy, hydrogen technology has lost a bit of luster.
The cost-effectiveness of solar-plus-storage, in particular, is severely denting FuelCell’s fortunes. Although the company has done well in the latest quarter, there are better options in alternate energy that investors can explore at this point, just looking at the future.
A Closer Look at FCEL Stock
Despite a better than expected quarter, FuelCell remains at a disadvantage. Solar-plus-storage is becoming cheaper with every passing quarter. It competes directly with FCEL as an attractive alternative energy source.
Perhaps the most prominent company involved in the space, Tesla (NASDAQ:TSLA), is investing billions into developing cheaper and effective solar offerings.
That’s why companies like Sunrun (NASDAQ:RUN), First Solar (NASDAQ:FSLR), Vivint Solar (NYSE:VSLR), SunPower (NASDAQ:SPWR), SolarEdge (NASDAQ:SEDG), and Enphase Energy (NASDAQ:ENPH) are enjoying a great run.
Even though stocks go through their peaks and valleys with each passing day, due to installation and financing costs coming down, solar will always have the edge over hydrogen-based power options.
Although FuelCell Energy benefits from having a sizeable market share of its industry, its future growth hinges on how effectively it can compete with solar companies.
Not a Lot Left in the Tank for FCEL Stock
As the world moves towards greener energy sources, we’re seeing increased excitement among environmental groups that are championing the cause. However, it’s unlikely that oil companies will be replaced overnight.
FuelCell Energy’s power plants are the kind of clean energy alternatives we are looking for. The stationary power plants use natural gas and renewable biogas to make electricity that can be used for a variety of purposes. So far, the company has managed to produce 10 Mwh of energy through its power plants. As time goes on, the equipment used will become less costly, leading to increased usage. But there is one hiccup there.
Solar-plus-storage is becoming the alternative of choice for distributed energy technology. Although FuelCell has done well in its recent quarter, the company has never turned a profit. There will always be niche areas where its power stations will be useful, it’s tough to see a situation where it can become the be-all and end-all in the alternative energy space.
Q2 Results Instill Confidence
Don’t get me wrong. FCEL stock is not a bad company in the hydrogen fuel space. The company has outperformed every one of its peers in terms of total return.
The company’s operating metrics also remain very healthy, with revenues coming in at $18.9 million, growing 105.4% year on year and beating analyst estimates by $3.33 million. Net loss for the quarter was also narrower than the year-ago period — an encouraging sign.
But the vital thing to note here is that the company is operating in a niche sector within the renewables sector. FuelCell Energy is concentrating on stationary fuel cell power plants. That makes it a different type of stock in comparison to peers Plug Power (NASDAQ:PLUG), Bloom Energy (NYSE:BE), and Ballard Power Systems (NASDAQ:BLDP).
These companies are focused on building out a clean hydrogen supply chain; different from FuelCell’s molten-carbonate fuel cell technology. That’s why FCEL stock should be treated a bit differently.
Lastly, it’s worth highlighting that the company has fueled its growth through a mix of debt and equity in recent years, as it struggles to turn a profit. That’s why FCEL’s debt load has increased exponentially over the last five years.
When a company is struggling for profits, it will need to continuously borrow money to keep the lights on. Long story short, if you want to invest in this one, you must be in it for the long haul.
My Final Word
FCEL stock trades at 11.84x trailing enterprise value-to-sales, very expensive vis-à-vis the market. Add to that the issues already outlined in the writeup and you have the recipe of a very expensive stock. It would be best to stay away until we see FuelCell showing signs of becoming profitable.
Before that time, it would be very risky to invest in a company that is trading more on expectation rather than its ground realities.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. As of this writing, he does not directly own the securities mentioned above.