From an initial perspective, wave energy specialist Ocean Power Technologies (NASDAQ:OPTT) appears like a profound scientific concept that is too far ahead of its time, thus relegating it to throwaway status as an investment. Taking a brief look at the long-term chart for OPTT stock is all you need to start feeling queasy about exposing yourself too much to this speculative opportunity.
In addition, the financials are inarguably a mess. For one thing, there’s much weakness in the books, characterized by an Altman Z-Score below -16, which suggests a deeply distressed organization. Further, the company has a history of negative free cash flow and dilution of OPTT stock. Not surprisingly, Gurufocus.com warns that Ocean Power is likely overvalued.
In other words, OPTT is a cheap stock in psychological terms only. Otherwise, Ocean Power’s history of failure and flawed financials, as our own Will Ashworth pointed out, makes these shares ones to avoid.
A Good October
Still, OPTT stock is having a solid month so far, with the market value more than doubling since the close of Oct. 1. Additionally, between Oct. 2 and Oct. 7, OPTT almost tripled in value.
Of course, you can look at this dynamic in two ways. On one hand, any publicly traded company can benefit from extreme enthusiasm, particularly in the new normal. After all, this year produced some incredible gains in bankrupt companies like Hertz Global (NYSE:HTZ). But on the other hand, the momentum could be a sign of better things to come.
For instance, I haven’t exactly been a cheerleader for General Electric (NYSE:GE). However, GE has been having a brilliant month so far, buoyed by hopes that the troubled Boeing (NYSE:BA) 737 Max could return to European flights by the end of this year.
If so, that could really change the narrative for GE. But will a similar sentiment apply to OPTT stock?
Why You May Want to Rethink OPTT Stock
Back in August of this year, Ocean Power announced a significant milestone: its PB3 PowerBuoy wave energy converters achieved more than one-and-a-half years of continuous operation. That’s very impressive, especially considering that the ocean isn’t exactly what you call a hospitable place.
Yes, the science behind OPTT stock is profound and could be a gamechanger. With so much untapped kinetic energy “stored” in the movements of the deep waters, wave energy infrastructure would be a win-win. First, you get the energy. Second, it’s basically all clean energy, which perfectly fits into our political dialogue.
However, the ocean is a very dynamic place, featuring motion of various velocities. As well, you have to contend with saltwater and the variable temperatures. That’s murder for technological equipment. So, the fact that Ocean Power was able to maintain operational resilience is a huge deal.
Not surprisingly under this context, Italian multinational oil and gas company Eni (NYSE:E) extended its lease for the PB3, which the company utilizes to power its underwater vehicles. That’s the main reason why OPTT stock soared earlier this month.
A Wide Focus
But given the tough financial situation that Ashworth warned InvestorPlace readers about, it might seem risky to bet on Ocean Power on this news alone. Indeed, it is risky. However, at some point, it’s possible that wave energy will become mainstream.
Admittedly, to Ashworth’s point, Ocean Power has consistently failed to deliver the goods. Nevertheless, in the energy arena, OPTT could be this market’s Novavax (NASDAQ:NVAX). As you’re probably aware, Novavax was on the verge of collapse before the novel coronavirus gave it immediate relevancy. Suddenly, nobody cares about the biotechnology firm’s prior problems.
However, the analogy doesn’t quite fit because Novavax still risks irrelevancy if it fails to deliver on a Covid-19 vaccine. On other hand, Ocean Power’s underlying fundamentals have a very long pathway toward upside.
In 2016, installed capacity for wave energy in the U.S. significantly lagged Asian and European nations. To be fair, the U.S. consented to 691 wave energy projects at the time. Still, other countries also planned to beef up their infrastructure.
Further, Sweden, which has already installed several wave energy units, has demonstrated keen interest in building out more infrastructure. Thus, you don’t want to have a narrow focus on OPTT stock, as the underlying company could expand its international consumer base.
Scale Is the Key
At the same time, there’s no denying that Ocean Power is a speculative investment. One of the major drawbacks of wave energy is economics. Right now, if you want to enjoy green energy, wind and solar provide much more economically efficient channels. Wave energy sticks around, though, due to “piecemeal government funding.”
But what if international government agencies stopped playing around and started taking this industry seriously? It’s interesting to note that Ocean Power originally designed the PowerBuoy for commercial purposes. However, that strategy didn’t pan out. It will likely never pan out until the likes of General Electric or other industry giants put their full weight into this market, thereby providing mainstream evangelization of the business concept.
For the intermediate term, government bodies could bolster investments like OPTT stock. After all, the ocean covers more than 70% of the surface of our planet. That’s a massive source of untapped energy. However, scale is the key to making wave energy economically feasible.
Of course, the risk is whether the political will exists to make wave energy a realistic choice. However, with Joe Biden leading in the polls (not that you should read too much into this), it’s possible that OPTT stock has substantial upside remaining.
The Bottom Line
Conservative investors may want to wait out the volatility because shares are overpriced relative to the fundamentals. However, if OPTT goes on discount, this is worth considering for your speculative portfolio.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.