There are so many possible avenues to explore why Gevo, Inc. (NASDAQ:GEVO), a renewable resources company, soared over 170% within the past year. What is the key catalyst for the GEVO stock rally, given that its fundamentals are not that strong, especially profitability?
If you answered with the broader economy, underlying changes in the Alternative Fuels industry, EPS surprises, strategic business deals, or expected growth and expectations, you’d be correct. However, If I had to pick just one reason to argue why Gevo has performed so well, it would be the changes and capital poured into the industry.
President Joe Biden signed a massive $1.2 trillion plan to rebuild infrastructure, address climate change and racial inequities, and reshape the economy, with the ambitious goal to create the “most resilient, innovative economy in the world.” It’s considered by President Biden to be “a once-in-a-generation investment in America.”
Similarly, a clean energy investment bill passed by the U.S. Senate is worth $550 billion. These capital plans create strong business opportunities for companies such as Gevo. Companies and their stocks move if their sectors and industries are strong, hot and have key catalysts. I can’t think of a better catalyst than the U.S government investing large amounts of capital to transform the economy into running on clean energy.
This is a great opportunity for Gevo. With a massive government investment coming and market news abuzz about renewable energy, GEVO stock should be a homerun. There’s one catch though, financial performance is non-existent.
Big Partnerships Abound for GEVO Stock
Gevo on its website states that “Gevo addresses the market need of reducing greenhouse gas emissions with sustainable alternatives, and is commercializing the next generation of advanced, bio-based renewable fuels with sustainable aviation fuel, renewable premium gasoline, and renewable natural gas that have the potential to achieve zero carbon emissions over the lifecycle of the fuel.”
Its products include carbon-neutral fuel, aviation fuel, animal feed and protein, ethanol, renewable diesel and many more that are suitable for several markets, such as marine industries, private aviation, clean cities, specialty vehicles and more.
Gevo has made waves securing partnerships with other big players in multiple industries. Some of the key partnerships announced include a deal with the Archer-Daniels-Midland Company (NYSE:ADM) to support production of sustainable aviation fuel (SAF) and other low-carbon-footprint hydrocarbon fuels that use ethanol; a partnership with Axens North America for the commercialization of sustainable ethanol-to-jet (ETF) projects in the U.S.; and an acquisition of sorts for Butamax patents on isobutanol and isobutanol derivatives.
Financial Red Flags
While Gevo has done well to make strategic partnerships, that doesn’t translate directly into dollar signs. As I mentioned before, it’s financial performance is essentially nonexistent.
In their third quarter, Gevo reported revenue of only $0.1 million, which is actually down 50% from revenue earned in the third quarter prior in 2020. That’s correct, their revenue actually dropped from $0.2m to $0.1m over the course of a year. They also reported a loss from operations of $14.7 million compared to $6.1 year-over-year. One silver lining could be their net loss per share improved by a single cent from $0.07 to $0.08 YOY.
There are several reasons that make me too uncomfortable with GEVO stock. First, is their weak revenue. Data from MarketWatch shows that for 2019 and 2020, annual revenue growth was -25.49% and -77.39%, respectively. For 2020, Gevo reported revenue of $5.54 million.
This renewable chemicals and biofuels company is unprofitable. From 2016 until 2020 it lost money. Operating cash flow (OCF) is also negative, meaning the company is unable to generate cash from normal operations. That implies there is trouble smoothly running the business. To overcome this, Gevo should either borrow money via financing or raise additional capital via investment.
Gevo has chosen to fund its operations based on stock dilution. According to Simply Wall Street “Shareholders have been substantially diluted in the past year, with total shares outstanding growing by 69.8%.”
On top of that, Gurufocus gives a Piotroski F-Score of 2 out of 9, which usually implies poor business operation. Add the fact that free cash flow has been negative for 2016-2020, which means there is a cash burn problem along with the other severe fundamental flaws, and GEVO stock is basically valued on thin air. MarketWatch also lists GEVO stock as carrying a hefty 43.67 price-to-sales (P/S) ratio and a 917.67 Enterprise Value to Sales (EV/S) ratio, implying the stock is too expensive.
Time for Action, Gevo
Gevo recently posted an article on the COP26 (climate change conference), ending with, “COP26 has the right idea. But ideas aren’t enough anymore. We need to act. It’s going to take all our ideas put into practice…to begin to solve the greenhouse gas emissions problem.”
Those are fine words, but ironic given Gevo’s own performance.
Gevo needs to address it’s financial woes. A great starting point would be increasing its weak revenue.
I consider the stock risky and expensive with a plethora of problems. That said, the U.S. government just gave GEVO stock a reason to be hopeful. Gevo should do well to capitalize on the opportunity.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.