After analyzing the transcript of the fourth-quarter earnings conference call for Gevo (NASDAQ:GEVO), I believe the company’s new initiative looks poised to turn its currently weak financial results around. However, the risks of the initiative and the elevated valuation of GEVO stock are keeping me on the sidelines on this name for now.
Referred to by Gevo as “Net Zero 1,” the initial stage of the initiative involves the production of “energy dense hydrocarbons” from plant matter without releasing any carbon emissions. According to Gevo CEO Patrick Gruber:
“These hydrocarbons are dropping gasoline and jet fuel products that when burned have a net-zero greenhouse gas emission across the whole of their life cycle, measuring all the way from capturing the CO2 in the atmosphere, accounting for the farming and agriculture, accounting for all the energy sources, the transportation of the products.”
“Net Zero 1” will be spearheaded by a plant the company plans to build in South Dakota. Gevo expects the facility to manufacture “roughly 400 million pounds per year of value-added protein-rich animal feed, roughly 30 million pounds of corn oil, [and] 45 million gallons per year of energy dense liquid hydrocarbons,” Gruber stated.
The company expects to start selling the fuel produced by Net Zero 1 in 2024.
At this point, the biggest downside to investing in GEVO stock is that Gruber did not share many details on the conference call about the level of demand for liquid hydrocarbons that the company anticipates.
The CEO did indicate that Gevo already has signed “contracts” for “more than 45 million gallons per year of hydrocarbons.”
The cost of “green hydrogen” is expected to fall to about $4 per gallon in the mid-2020s, according to David Keith, a professor at Harvard University. If Gevo is able to sell 50 million gallons of its net-zero hydrocarbons for $4 per gallon, that will come to $200 million of annual revenue.
That’s pretty good, and it will certainly tremendously boost the company’s top line, which came in at $5.5 million in 2020. It’s also likely to somewhat raise Gevo’s operating income, which was a loss of $26.3 million last year.
But it’s not a very big number, considering that Gruber expects the plant to cost $750 million, that the market capitalization of GEVO stock is nearly $2 billion, and that the project isn’t expected to generate revenue for three years.
Importantly, the CEO did not say much about additional potential demand for the fuel beyond the “more than 45 million” that Gevo has already sold.
He only stated that, “several parties are in discussion with” Gevo about buying its net-zero hydrocarbons. Gruber also indicated that potential strategic partners had recently become more interested in making a deal with Gevo and that the company would be able “to make a more balanced deal” with a potential strategic partner than previously.
Investors who have a bullish position in GEVO stock or are thinking of taking one have to consider multiple risks.
The biggest risk is that, for various potential reasons, the demand for Gevo’s hydrocarbons may not ultimately be strong enough to support its valuation and the cost of its plant, let alone the cost of the multiple additional plants that the company plans to build.
As I pointed out in my previous column on Gevo, Brazil has used sugar to power vehicles since the 1970s, yet that technology was never adapted in the U.S. Other types of ostensibly carbon-free biofuels, such as recycled grease, have been around for some time, but never caught on in a big way in the U.S. or, to my knowledge, anywhere outside of Brazil.
Now, with electric vehicles, solar power, wind power and, lately, hydrogen getting support from governments and a large amount of publicity, Gevo could struggle to compete with those much better-known “green” products.
Indeed, companies, which are eager to convince their customers that they are “green,” may see primarily puzzled looks and expressions when they say that their products are powered by “net-zero carbon hydrocarbons,” which could sound like an oxymoron to some. As a result, many companies could shy away from spending the significant amount of time and money necessary to adopt Gevo’s fuel.
Another risk is that the price of “green” hydrogen could drop much more than expected by 2024, making Gevo’s hydrocarbons uneconomical. Finally, another InvestorPlace columnist, Josh Enomoto, recently reported that biofuels tend not to perform very well in cold weather.
The Bottom Line on GEVO Stock
Beyond the “over 45 million gallons” of demand cited by Gruber, it’s difficult if not impossible to estimate what demand for Gevo’s hydrocarbons will be. That’s largely because, to my knowledge, governments are not supporting biofuels and I have not heard about strong demand for them from companies.
Meanwhile, there are other risks which could prevent demand for Gevo’s biofuels from being strong.
Finally Gevo’s market capitalization is elevated. As a result of all of these points, GEVO stock is worth watching, but not taking or holding a position in.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.