Gevo (NASDAQ:GEVO) spent most of the last year trading at no higher than a dollar. By the end of the year and into 2021, that changed. GEVO stock posted barely any revenue in the last year. The renewable fuels maker lost 8 cents a share on a non-GAAP basis.
Before investors buy the stock to chase for more gains ahead, ask why the stock is up by so much.
Gevo posted nothing fundamentally impressive in the last quarter. Yet its investor presentation hosted last month might give momentum investors a clue on the stock’s recent strong performance.
GEVO Stock Defies $192,000 Revenue
In the last quarter (Q3/2020), Gevo’s revenue fell by almost 97% to $192,000. This missed consensus estimates by $503,000. CEO Patrick Gruber described the quarter as extremely significant for the company. It booked 48 million gallons per year of take-or-pay-off agreements. The contract value is worth $1.5 billion. They typically run for around six or seven years.
Markets are responding to the sharp increase in demand by projecting the company’s growth beyond its Luverne facility.
Meeting customer demand will require secured financing. CFO Lynn Smull said that it needs around $700 million at the project level to finance three plant construction projects. When finished, they would supply around 70 million gallons annually. For investors, as a special purpose entity structure, the funding would not dilute investors.
On Jan. 25, Gevo closed a direct offering of 43.75 million shares at $8.00. Strong demand for clean energy companies overshadowed the shareholder dilution. The stock sale will give the company $350 million. Given the project costs ahead, shareholders should expect more direct offerings.
FuelCell Energy (NASDAQ:FCEL) and Plug Power (NASDAQ:PLUG) also sold shares. They both benefited from unlimited demand for the stock. So, after each offering, shares would dip slightly and then continue their march higher.
IP Portfolio Rich in Fermentation Tech
Gevo describes itself as capturing renewable energy and transforming it into energy-dense liquids. Founded in 2005, the company touted its $400 million worth of patents. It claims it may monetize renewable energy and carbon capture. It does this via fungible liquid transportation fuels.
The company’s last earnings report contradicts this claim. Gevo may have a $1.5 billion signed take-or-pay-off deal. But if customers cancel their contract, they may still head to the courts to argue for a lower payment due. Despite this author’s reservations, Gevo’s capture of renewable energy sounds compelling. The green energy capture requires a transformation to another form of storage. Without this solution, the industry will still rely on oil and gas for energy.
Gevo values its IP portfolio at $400 million. For example, its proprietary fermentation technologies and proprietary catalytic chemistry are key elements to its transformation solutions. Gevo also has many global certifications. This includes ISCC Plus. This enables the company to “validate the responsible nature of its liquid transportation fuels.”
Mounting Losses Raise Concern
Investors who take a minute to review Gevo’s results through to the end of 2019 will notice the sharp growth in losses. Revenue fell while negative operating income (losses) mounted, as shown below.
So long as the clean energy bubble continues, few investors will notice Gevo’s weak past performance. The demand for any penny stock turned billion-dollar market capitalization company is still very strong.
On Wall Street, analysts have a $17.00 price target on average. Be wary of that target because only two analysts cover the stock. In a five-year discounted cash flow growth exit model, Gevo’s fair value depends on a reader’s forecast. For example, a discount rate of 11.5% and a perpetuity growth rate of 4% implies a fair value of $12.00.
Gevo will reward experienced momentum traders. It is highly likely to punish speculators who missed out on the initial rally and fear missing out on more. The minute the latter group buys the stock, Gevo’s momentum may fade. That would send the stock sharply lower.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.