Due to a variety of factors, including FuelCell’s (NASDAQ:FCEL) technological innovations, the shorter and longer-term outlook of FCEL stock has improved meaningfully.
Nonetheless, given the still-gigantic valuation of FuelCell’s shares, its disappointing first-quarter results and the weakening of meme investors, I continue to recommend selling the shares now.
However, due to the improvements in FuelCell’s longer term outlook, weakness in the shares could create a good buying opportunity for some investors in the foreseeable future.
The biggest reason that I’m more upbeat on FuelCell now than in previous months is the new technology that the company has deployed, is developing, or is poised to unveil.
Most importantly, the company’s Carbonate Trigen system “delivers power, water and hydrogen,” FuelCell CEO Jason Few reported on the company’s first-quarter earnings conference call, held on June 10, and the system can also generate blue, green, and gray hydrogen.
Blue hydrogen is created with a combination of natural gas, carbon capture technology and electricity. Gray hydrogen is generated with only natural gas and electricity, while renewable sources, including biofuels, are used to create green hydrogen.
Somewhat validating Carbonate Trigen, Toyota (NYSE:TM) has agreed to utilize it at its facility located at the port of Long Beach, California. In September Few said that Toyota plans to use Trigen to produce hydrogen for its hydrogen-powered vehicles in California.
Given the likely huge increases in the utilization of hydrogen, due to backing for the fuel by governments and its tremendous utility for large trucks, the demand for Trigen could be quite meaningful.
Additionally, the product’s ability to generate hydrogen from both cheaper sources (natural gas and the grid) and more expensive and greener sources (renewable energy) make it quite versatile and potentially very valuable to many companies.
For example, some companies may want to generate hydrogen from the grid now, but have the ability to utilize renewable sources for hydrogen generation when green hydrogen becomes cheaper.
What’s more, the water that Trigen generates as a byproduct will be very valuable in parts of the world in which water is scarce.
Meanwhile, FuelCell says that it is in the process of developing an electrolysis product that it believes can generate hydrogen from electricity at a 90% efficiency rate. That efficiency level could climb to 100% if “nuclear power plant waste heat” is utilized in the process, the company reported. Current methods of producing hydrogen through electrolysis only have an efficiency level of about 80%.
In other words, with current methods of electrolysis, the hydrogen that is produced only has 80% of the energy of the electricity that is utilized in the production of the fuel. FuelCell is developing a process that could raise the efficiency level to 90% to 100%.
Few also noted that FuelCell is attempting “to develop reversible solid oxide systems for energy storage.” Given the strong demand and need for efficient, reliable, cost-efficient electricity storage systems to use in tandem with renewable energy, FuelCell’s storage products could one day generate meaningful sales for the company.
Finally, in a change that is helping the company now FuelCell’s COO, Michael Lisowski, reported on the Q1 conference call that it had made improvements to its fuel cells that had already been deployed. Those enhancements, in turn, have increased the electricity generated by those systems, raising FuelCell’s revenue.
On the negative side for FCEL stock, even though the company benefited from higher electricity output and the federal bailout of cities and states, its Q1 results were dismal.
For example, its Q1 operating loss jumped to $17.4 million versus $8.1 million during the same period a year earlier, while its sales tumbled 26% from last year, falling to just $14 million.
Meanwhile, as I’ve pointed out in previous columns, due partly to the weakening of cryptocurrencies and the drying up of government stimulus, the impact of meme stock investors has weakened. That could easily have a negative impact on FCEL stock, as the shares’ surge over the past year was likely helped by retail investors.
On the valuation front, despite the recent retreat of FCEL stock, the shares are still trading at a huge trailing price-sales ratio of 39.
The Bottom Line on FCEL Stock
FuelCell’s outlook has certainly improved. My sense is that Lisowski, who was promoted to COO from vice president of global operations two years ago, has a great deal to do with its enhanced prospects.
But in any event, the shares remain vastly overvalued. I continue to recommend that investors sell the company’s shares. But now I believe that, if the shares drop to the $3 to $4 range, then longer term, growth investors should consider buying a small amount of the stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.