FuelCell (NASDAQ:FCEL) stock looks like a good buy for short-term traders and investors, but I would not hold the shares more than a month or two.
FCEL stock is starting to roar due to favorable macro trends, even though the company is actually not actually well-positioned to exploit those trends.
Add in a high valuation, and it’s clear that they’re poised to sink (again) over the long term. For longer-term investors, Plug Power (NASDAQ:PLUG) is a much better stock to buy at this point.
On October 18, FCEL stock was surging. likely because the biggest European maker of hydrogen, INEOS, announced that it planned to spend more than $2.3 billion to develop “green hydrogen” on the continent, Reuters reported.
That’s a big investment, and the move shows that the company expects the demand for European hydrogen to be quite strong over the long term. That, in turn, is excellent news for companies that are well-positioned to exploit that trend. Unfortunately, as I’ll explain below, FuelCell does not appear to be one of those firms.
Nevertheless, likely due to a combination of short-covering and FuelCell’s popularity among the Reddit crowd, FCEL stock was booming on the INEOS news.
More upbeat macro news is likely to be reported this month, pushing the company’s shares up further as congressional Democrats look poised to pass both the infrastructure bill and their budget.
Indeed, a compromise on the key budget proposal called “Build Back Better,” appears to be in the works. Specifically, progressives, led by President Joe Biden, appear to have agreed to meaningfully reduce the size of the bill, and they also appear to be ready to compromise with Senator Joe Manchin on the Biden administration’s clean-power plan.
Positive Trends and FCEL Stock
Only in the last year or so has FuelCell begun to publicly discuss getting into the “green” hydrogen sector, and it does not yet appear to have made great progress in it.
The company is building a 2.3-megawatt platform for Toyota (NYSE:TM) at the port in Long Beach, California, CEO Jason Few said on the company’s second-quarter earnings call, held in September. That’s not a lot of power.
The platform, known as TriGen, will produce green hydrogen, but given its diminutive overall power output, I don’t believe that it will produce a great deal of hydrogen.
Few did not say when he expects the project to be completed, so it may not come online for some time.
Moreover, the CEO did not mention any projects or partnerships that the company is pursuing in Europe, which appears to be the epicenter of the new hydrogen economy.
Indeed, he indicated in his remarks that the company intends to focus on developing countries, which, in my view, are less likely to embrace hydrogen because of its higher costs.
So although FuelCell in theory could sell its TriGen platform in Europe, it doesn’t seem very well-positioned to do so.
Too Many Challenges and a High Valuation
In his Sept. 16 column in Seeking Alpha, columnist Henrik Alex pointed out some of the other difficult challenges facing FuelCell. For example, although the company reported stronger-than-expected Q2 results, the beat was mostly attributed to high service revenue, a trend that Alex does not expect to occur again going forward.
Meanwhile, the company reported record-low free cash flow and is taking a long time to complete a number of small projects. Finally, it sold the future rights to two of its projects at relatively unfavorable terms, according to Alex.
On the valuation front, the shares are changing hands for an extremely high 26 times analysts’ average 2022 sales estimate for the company.
Plug Power Is Much Better Positioned
Plug Power announced on Sept. 20 that it would build a new hydrogen plant in California.
The facility is expected to produce 30 metric tons of liquid green hydrogen per day. Plug is also building green hydrogen plants in New York, Tennessee, and Georgia that it expects will supply 500 tons per day of liquid green hydrogen by 2025.
Plug last month announced that it was expanding its European headquarters in Germany and has a joint venture with French automaker Renault.
The company has also installed several PEM technology electrolyzers used to create hydrogen in Europe. Recently, Plug announced an alliance with Europe’s largest plane maker, Airbus (OTC:EADSY), to study the possibility of using hydrogen to power planes.
The Bottom Line on FCEL Stock
With the shares seemingly linked to good news on the hydrogen front, they are likely to climb sharply in the next month or two. But over the longer term, I expect FuelCell’s “under-the-hood” weaknesses to become more apparent, undermining its shares.
So buying FCEL stock and holding it for a short time is a good idea. But for those looking for a buy-and-hold stock, one that they can largely forget about and that will enable them to sleep very soundly at night, PLUG stock is the far better choice.
On the date of publication, Larry Ramer held a long position in PLUG.
Larry Ramer 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. 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.