Editor’s Note: This article was updated on Nov. 12, 2020, to correct information about fuel cell tax credits and further expand on some information about FuelCell.
Cleantech company Bloom Energy (NYSE:BE), which makes clean-running stationary power generators, jumped as news broke that Joe Biden had won the 2020 presidential election. Bloom Stock stands to reap massive rewards in Mr. Biden’s push for clean energy.
Yet, it’s worth remembering the enormous amount of skepticism among Americans over Biden’s energy policies. According to Pew Research, half of conservatives believe expanding fossil fuels is more important than developing alternative energy.
To be fair, a similar percentage of conservatives believe a debunked theory that Microsoft founder Bill Gates wants to use the Covid-19 vaccine to implant tracking chips.
That means the most conservative Republican lawmakers will likely stonewall Mr. Biden’s attempts to help cleantech energy companies. While optimistic investors might want to buy Bloom Energy for potential gains, what should more cynical investors do?
Here’s a solution: Buy Bloom Energy and consider a short in FuelCell Energy (NASDAQ:FCEL), Bloom’s underperforming rival.
Bloom Stock Is a Diamond in the Rough
Bloom Energy, a maker of solid oxide fuel cells, has been a long story in the making. After spending almost nine years in stealth mode, the company finally announced its R&D breakthrough in 2010 to both hype and extreme skepticism.
“While Bloom may well have created one of the most efficient fuel cells, it is unclear how widely the company’s technology will be adopted,” The New York Times reported that year. “Cost and durability have limited the use of other types of fuel cells, and it could be years before the potential of the company’s approach is clear.”
Investors would have been right to wait. Since its 2018 IPO, Bloom Energy has disappointed investors, dropping almost 30% since opening day. The company’s flagship product, which turns natural gas and oxygen into electricity without combustion, wasn’t price-competitive relative to diesel generators.
But things are starting to change for this once profitless company.
Clean Energy: A Turnaround in Fortunes
In 2019, Bloom started to see more substantial commercial success. With wildfires and widespread power outages gripping California, power companies and industrials alike began turning to Bloom’s “always-on” microgrids to work alongside main grids.
Revenues at Bloom jumped to $785 million while operating margins narrowed from -42% in 2017 to -30% in 2019.
With Biden’s clean energy plan, more gains could yet come. The company’s core product, the Bloom Energy Server, generates just 33% carbon dioxide emissions of the average coal plant and creates virtually zero NOx and SOx emissions.
The miniature power plants essentially replace diesel generators in hospital, retail, and industrial uses.
Why Bloom Needs Biden
For all its technological achievements, Bloom Energy will still need a helping hand from the government to survive. That’s because the company’s Energy Server, while environmentally friendly, isn’t commercially viable. Without subsidies, they generate power of roughly 13.5 cents per kWh versus 10 cents per kWh for grid power.
To entice customers, Bloom has sold its products through Power Purchase Agreements (PPA). In these complicated financial arrangements, Bloom essentially purchases its own generators and leases to customers. That means, like Ford Capital or GE Capital, Bloom is a massive money-sink.
Bloom now holds over $1.2 billion in debt and spent $92.4 million every year in interest payments – about what it makes in gross income (money made before deducting overheads). It’s the same problem that companies like Sunrun have – their systems are so expensive that buyers won’t pay for them upfront, leaving the sellers holding the financial burden.
And that’s where legislation comes in.
Will Biden Expand Fuel Cell Tax Credits?
In 2005, the U.S. government added a series of investment tax credits for the clean energy industry. By allowing a 30% tax credit on certain renewable energy systems, the federal government virtually jump-started the U.S. solar and wind industry. Various administrations have since extended certain energy tax credits through 2023.
Similar legislation already exists with fuel cells. These credits, however, only put fuel cell technology on parity with solar cells and also expire in 2023. The fuel cell industry will need more; after almost a decade of business, Bloom has only installed 380 megawatts of energy, not much more than Vermont’s solar energy capacity.
So, unless a Biden administration beefs up and extends these incentives, the industry could hit a wall.
What if Biden Doesn’t Deliver? Short FCEL.
There’s one wrinkle to the fuel cell saga: solar and lithium-ion battery technologies have already surpassed Bloom’s technology. Without subsidies, solar and onshore wind are already 70% cheaper than Bloom’s solid oxide fuel cells. And the difference will only get worse.
According to BloombergNEF, an energy research firm, lithium battery prices could fall to $100/kWh by 2024 and $60/kWh by 2030.
That means, unless Bloom makes a pricing breakthrough or federal incentives get added, fuel cells will get priced out by cheaper solar panels and battery installations. So, to close out industry risk, investors should consider shorting FuelCell stock, a technologically challenged version of Bloom Energy.
FCEL Stock: An Industry Laggard
Bloom Energy’s rival, FuelCell, has seen even more significant troubles.
“FuelCell has been reduced to a shell of the company it was,” Bloomberg wrote last year, “all but crushed by the economics of solar and wind power and outgunned by rivals including Bloom Energy Corp. that offer more flexible and less bulky systems.”
The problem is that FCEL’s technology has failed to keep up, despite its technology having some advantages. Despite having partnerships with ExxonMobil, Fraunhofer and Clearway Energy, its product revenues have shriveled to zero as customers have switched to alternatives (FCEL still earns revenues from legacy power generation and service/licenses).
Yet, investors continue to hold out hope. Today, FCEL generates one-tenth of Bloom Energy’s revenues but is still worth about 30% of Bloom stock. In other words, it’s 8.1x price-to-sales (P/S) ratio is far higher than Bloom’s 2.8x despite having worse technology.
That makes a BE/FCEL long/short an ideal play for investors who worry that Mr. Biden’s administration won’t follow through with their wide-ranging promises.
Conclusion: With Bloom Stock vs. FCEL Stock, It’s All About Technology
Readers should know that, as a high-growth tech investor, I look for companies that have three factors:
- A growing market
- A proven product or management team
- A catalyst that tells us, “why now?”
And when it comes to Bloom Energy, the company ticks the three boxes far better than FCEL does. And the gap looks set to widen: FCEL’s R&D budget has shrunk to just $4.7 million, while Bloom Energy’s remains at $88.2 million.
Not everything is perfect with Bloom Energy; its PPA agreements sit like a cash-consuming black hole on its balance sheet, and lithium-ion battery technology threatens to upend its business. But the company is in a far better position than FCEL to succeed. That’s because it has one ace-in-the-hole: its technology. And that’s something worth investing in.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.