The positive vibe for clean energy coming from the Biden administration is giving Gevo (NASDAQ:GEVO) a nice tailwind. GEVO stock is up more than 230% for the year so far. Like many renewable energy stocks, Gevo is getting a lift because of the perceived likelihood that the Biden administration is going to put the accelerator to the floor to get America to a clean energy future.
If that is the case, then it’s likely that Gevo may go much higher. Simply put, Gevo is a biofuel company. However more specifically, it creates fuels that will be able to be used as a substitute for traditional fossil fuels, but with lower carbon emissions. In fact, the company is striving for zero carbon emissions while delivering a product that will perform as well or better in engines that use traditional fossil fuels.
Gevo is perhaps, at worst, a bridge to an electric vehicle future. At best, they could be a major disruptor. That being said, the company is light on revenue and has a history of diluting its stock.
GEVO Stock Has Been Much Higher
Gevo recently launched itself out of the penny stock range. But it wasn’t that long ago, when it was a triple-digit stock. In December 2016, the stock was trading for over $100 per share. But it quickly began its steep descent.
Based on the stock’s current price movement, you could presume that the volatile price movement was due to the transition from the Obama administration to the Trump administration. But an article from Forbes in 2017 adds more context to what was going on at that time.
As it turns out, Gevo had a habit of announcing positive news, watching its share price rise and then issuing new stock which then diluted the share price. Of course, this isn’t anything new. Nor is it atypical for a company that is not profitable.
However, after several cycles of this, investors tend to catch on to what’s happening and they stop rewarding the stock.
Will History Repeat Itself?
With that information at the front of my mind, I found it interesting that Gevo’s recent announcements seem to strike a familiar chord. In August, the company’s stock began its ascent due, in part, to a “take or pay” contract that it signed with Trafigura. The contract for high-octane gasoline and some sustainable aviation fuel (SAF) is the largest that Gevo has ever signed.
Then in December, Gevo announced it had exercised an option to purchase 239 acres of land in South Dakota that it would use to build a facility that is capable of producing 45 million gallons of SAF and renewable gasoline products. At the same time, the company said it had met its first milestone in the Trafigura contract.
However just last month, the company announced that it closed a $350 million stock offering. Take out of that what you will. It’s a stark reminder, however, that not only is Gevo not profitable it is starved for revenue.
In the first three quarters of 2020, Gevo has generated approximately $5 million in revenue. That’s a nearly 80% drop from the $24.49 million for the prior year. But the 2019 number was a 25% year-over-year decline from 2018. So Gevo’s revenue was going in the wrong direction before the pandemic.
Maybe This Time Is Different
Many investors have been left holding the bag from believing that this time a company’s story is different. Since I’m not a chemical engineer, it’s hard for me to say how easy it is to produce a biofuel such as isobutanol commercially.
But it’s clear that no matter how difficult it is, it costs money which, at this time, Gevo does not have. A stock that was so recently a penny stock remains a highly speculative bet. GEVO stock may be worth a speculative bet as part of your clean energy portfolio, but I wouldn’t chase it at its current price.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.
