The Bull and Bear Cases for FuelCell Stock: Will It Resume Its Rise or Continue to Fall?

Investors in FuelCell Energy (NASDAQ:FCEL) certainly have an intriguing stock to consider. On the one hand, FCEL stock represents the green future. The company’s four operating segments it’s pursuing at present (via its 10-K) are:

a picture of a fuel cell
Source: Kaca Skokanova/Shutterstock
  1. Distributed generation
  2. Distributed hydrogen
  3. Hydrogen energy storage and hydrogen power generation
  4. Carbon capture

Distributed generation via fuel cells powered by natural gas and biogas (still a low-emissions product relative to other “dirty” microgrid solutions) makes up the primary source of revenue for FuelCell. This segment is one that provides a number of growth opportunities investors have jumped on. Distributed generation provides microgrid/grid resiliency, combined heat and power and carbon capture opportunities, as well as multi-fuel capabilities.

However, what investors are most interested in of late is the company’s move into distributed hydrogen power and hydrogen energy storage. These hydrogen fuel cell solutions are what ESG (environmental, social and governance) investors are looking to right now for growth.

Given the excitement around President Joe Biden’s green focus via his infrastructure plans, investors are banking that FCEL stock can provide the kind of growth green-energy solutions have promised for decades. Indeed, FuelCell is a company that seems to have been transitioning to hydrogen fuel cell technology for years. If adoption finally takes off, and consumers begin demanding these solutions, there’s hope that FuelCell could take investors on a nice ride.

Let’s look at the bull and bear takes on FuelCell today.

Bulls Suggest FCEL Will Ride the Political Green Wave

Indeed, Biden’s election win was perhaps the greatest catalyst FuelCell investors could have hoped for.

The incredible run FCEL stock went on immediately following his win in November is notable. After trading within a relatively narrow band around $2.50 per share for most of 2020, shares took off in November in a steady ascent higher. Indeed, FCEL stock hit a high near $30 per share early this year. Momentum traders bid green energy stocks to astronomical levels amid a speculative rush toward sectors with overt political backing.

Reports that hydrogen would be a focal point of the green energy investments made by the Biden aadministration lit a fire under this stock. In fact, FCEL stock appreciated to a level many bulls may not have expected. Currently, FCEL stock trades at an EV/sales multiple of roughly 35, with a stock price around $8.50 per share. That’s high. Considering this stock traded at $30 just a couple months ago, such a drop may have been expected.

However, there’s hope among green-energy investors that companies powering the hydrogen revolution will be able to make it this time. Hydrogen power has been around for a long time. However, commercializing this energy source has proven difficult.

FuelCell’s business model of providing power-generation plants for commercial users and the transportation sector may be one that wins the day. Commercial users such as “utilities, large industrial users, data centers and other customers focused on clean and affordable power” have an incentive to go green. Every company is attempting to lower its carbon footprint. It turns out this transition has been good for the environment, as well as companies’ stock prices.

Accordingly, there’s hope that FuelCell’s model will be one with the staying power to be successful long-term.

Bears Cite Valuation Concerns and Analyst Downgrades

Yes, FCEL stock has declined nearly 72% from its peak earlier this year. However, it’s still a very expensive stock.

As mentioned, the company’s valuation multiples are off-the-charts expensive. Investors in FCEL stock need to pay 35 times forward sales to gain exposure to this green-energy name.

How expensive is this?

Well, I thought I’d take a look at how FuelCell’s valuation compares to high-profile players in the cannabis sector. After all, the cananbis sector is one that also took off following Biden’s election. It’s a highly speculative sector driven by sky-high growth exceptions. Surely, I thought I’d be able to find companies valued more steeply than FuelCell.

I was wrong.

FuelCell’s trailing-12-month and forward EV/sales is higher than nearly all of the 50+ cannabis companies listed on this comp table list. This makes the fundamental investment case for FCEL stock very difficult to justify.

Additionally, analysts have been growing bearish on FCEL stock, for many of the same reasons.

Valuation concerns were cited as a key reason for a downgrade of FCEL stock in January by JP Morgan. Wells Fargo analyst Praneeth Satish cited valuation and commercialization concerns as reasons for its underweight rating and $9 price target.

Conclusion on FCEL Stock

I do think the story is an attractive one with FCEL stock today. If the company can indeed crack the commercialization problem hindering the hydrogen space for some time, this could be a stock that  takes off once again.

However, the proof is in the pudding. As of yet, we haven’t seen the growth that investors expected. I think the company’s valuation multiple is extraordinary, and as such, it’s simply too difficult to justify investing in this stock right now.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective. 

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