In what seems to be a recurring pattern, FuelCell (NASDAQ:FCEL) fell sharply after another disappointing quarter. Shareholders might be feeling a sense of deja vu since a dismal earnings report has become a norm rather than an exception for FCEL stock.
But why is that so? For those not in the know, FuelCell is an alternative energy provider that uses natural gas and biogas for its services.
Alternate energy is all the rage, and the company is an essential player in the space. However, operational issues and substantial cash burn are weighing down results.
More importantly, as I mentioned in my last piece, solar power is eclipsing other renewables in terms of cost and accessibility.
Aside from weak operating numbers, bankruptcy seems a grim but omnipresent reality. FuelCell seems comfortable selling a substantial amount of shares to fund operations. With a mountain of debt to contend with, and no demand, FuelCell is left with few options. Unless a turnaround happens quickly, FCEL stock could face the ax sooner rather than later.
FCEL Stock Faces an Uphill Battle for Survival
The latest quarterly numbers did not instill a lot of confidence in FCEL shareholders. Although the clean energy company managed to eke through unscathed in the second quarter, Q3 saw the novel coronavirus pandemic pummeling its financials.
The management acknowledged that the virus had a material impact on its results. And the worst part is that the effect is likely to continue for at least a few quarters. That means it will be tough to solicit new contracts and existing lines of business will remain stressed.
Apart from the general Covid-19-induced slowdown, FCEL suffered from product issues unique to the quarter. It replaced two modules on one site to enhance performance and adjusted the expected timing of future module replacements at one project.
FuelCell is also burning cash at an exponential rate, almost $20 million as of the latest quarter. Considering the lack of demand and operational expenses, expect this figure to rise moving forward.
The money to finance this cash burn will come from share issues. In Q3, FuelCell raised net proceeds of $62.3 million from the issue of 25.1 million shares.
The stock was issued under a $75 million “Open Market Sale Agreement” with Jefferies LLC. Due to the sales, the share count rose by 20%. Despite the substantial dilution, don’t expect FuelCell to stop issuing shares. As already outlined, there are few financing sources left. Stock issues are the only option the company has to keep the lights on.
POSCO Energy and FCEL Stock
FuelCell and its former South Korean partner POSCO Energy are at loggerheads, and the fight has become legal. FuelCell wanted to enter the Korean and broader Asian markets and felt that an alliance with POSCO would be its best bet. Fast forward to the current date, and both the companies have initiated actions against one another.
POSCO Energy has sued for allegedly providing a defective component and power-conditioning (stabilization) equipment. The South Korean private energy producer says it suffered $809 million in economic loss because of this arrangement. Separately, FuelCell filed a demand for arbitration against POSCO Energy and KFC in the International Court of Arbitration.
These legal battles will come at a cost, both in terms of time and expenses. The only bright side I see here is that the company can still market its products in Asia while the trial continues.
Much of the Same
There haven’t changed much since the last time FuelCell reported earnings. The operating metrics don’t instill a lot of confidence, and they are unlikely to improve within the coming quarters due to Covid-19. Cash burn is still a massive issue for the company and will lead to more stock dilution before the end of the year.
Management has also indicated that it will be difficult for it to solicit new business due to Covid-19. FCEL stock is a risky proposition. What’s worse is that there are no signs things will improve for the business moving forward. And with renewables like solar getting cheaper by the day, FCEL stock looks more and more like a dud.
Disclosure: On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He 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.
