Since November, Gevo (NASDAQ:GEVO) stock has been a rocket. The shares have gone from $1 to a high of $15.50. Of course, this has not been a one-off. Many other renewable energy companies have also pulled off huge rallies like FuelCell Energy (NASDAQ:FCEL), Plug Power (NASDAQ:PLUG) and Bloom Energy (NYSE:BE).
Over the years, there have been periodic major bull moves in the sector. For now, one of the main catalysts has been huge success of Tesla (NASDAQ:TSLA), which has revolutionized the automotive industry. The result is that the company is one of the most valuable in the world. Consider that the market capitalization is a staggering $685 billion, making CEO and cofounder Elon Musk one of the richest people in the world.
In light of this, investors are looking for the next Tesla. So then, might GEVO stock be a worthy contender?
Well, I think investors should be very cautious – and let’s see why.
What Is Gevo?
Gevo is no startup. The company got its start back in 2005. The company had three cofounders, which included Frances Arnold, Matthew Peters, Peter Meinhold. In fact, Arnold would go on to win the Nobel Prize for chemistry in 2018 for her pioneering work in enzyme research, which was critical for Gevo’s development of isobutanol (she is no longer an executive at the company).
The process essentially involves the conversion of biomaterial – such as non-food corn – into a low-carbon renewable liquid fuel. It can be used for gasoline, diesel and even aviation fuel. Gevo’s technology can also be used with all types of engines and ages of vehicles. In other words, the technology is potentially disruptive.
But despite all this, the adoption has been a slog. The current fossil-fuel industry has remained fairly robust, especially given there have been lower energy prices.
As a result, Gevo is a small company. For the first nine months of 2020, revenues came to a mere $3.8 million, compared to $16.8 million during the same period a year earlier. There was also a net loss of $22.1 million.
The big fall-off in revenues was primarily due to the pandemic, which resulted in terminations of agreements for production. For example, the top line for the third quarter came in at a mere $200,000.
Now Gevo is well-capitalized, as the company was smart to do an $350 million equity offering when the stock was rallying (there is a total of $534 million in the bank). The company is also in the early stages of developing a new plant in South Dakota that will be able to produce 45 million gallons per year of jet fuel and renewable gasoline products.
Then there was the announcement of a major deal with Trafigura, which is a large energy operator. The agreement involves up to $1.5 billion in revenues across all contracts over a 10-year period.
However, it will still take a few years to get to critical mass.
Bottom Line On GEVO Stock
One of the catalysts for GEVO stock has been the election of President Joe Biden. No doubt, he is committed to finding ways to expand renewables.
But the optimism may be overdone. The Democrats have a razor-thin majority in the Senate and several of the party’s members are fairly conservative. Besides, with the huge spending for the Covid-19 relief bill, there may not be much appetite for taking on ambitious new programs.
In the meantime, Gevo still has a lot to prove. Again, its core business has seen little traction – and there will continue to be major expenses and capital investments. So given that GEVO stock already has a large market capitalization – at $1.7 billion – it is probably best to avoid this one for now.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.