GEVO Stock is a Risk-On Asset in a Risk-Off Market

I wrote about Gevo (NASDAQ:GEVO) in February 2021 when it was heading towards its meme-stock induced 52-week high. As a company that was, and remains, a pre-revenue company, I made a bearish call on GEVO stock.

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That proved to be the right call. Since February, GEVO stock went on a steady trip lower, but had seemed to find a solid level of support.  

However, since December 2021, GEVO stock has cut through that level of support and, as of this writing, sits at $3.50 a share. Realistically, it could go lower.

Now trading below $5, Gevo looks a bit more interesting. However, I have to caution you. This stock is only for speculative investors who have the time and patience to wait for the company to deliver revenue. 

A Bet on Renewable Fuels 

The elevator pitch for Gevo is certainly compelling.

The company is a play on renewable hydrocarbon products, specifically low-carbon liquid transportation fuels that will be sustainable alternatives to traditional fossil fuels.

The company’s process is to transform carbon into liquid hydrocarbons that have a potentially “net zero” GHG footprint. Gevo does this by using a combination of photosynthetic energy, wind energy and biogas energy.

And the company is focusing on three areas that would appear to have high demand. The first is sustainable aviation fuel. The electric vehicle (EV) movement is certainly ramping up, but whatever form that takes, it will be a long time before technology like that is ready for the aviation industry.

Gevo is also making inroads into two other areas: renewable gasoline for commercial fleets and regenerative agriculture that focuses on “growing feedstocks in ways that sequester carbon and improve the soil.”

Managing Revenue Expectations 

First the good news: if the company’s estimates are correct, revenue is on the way. In its December 2021 investor presentation (page 5), Gevo said it has approximately $3 billion in financeable contracts already in place. And the company is negotiating an additional $30 billion in contracts with what the company terms “high-quality” customers.

That’s bullish news. However, the commercial supply arrangements won’t begin until 2024. In the meantime, Gevo is taking steps to get its Net Zero projects constructed..

However, as our own Louis Navellier wrote late last year, Gevo does have $522.4 million in cash on hand. That should sustain the company until it begins to generate revenue. That would be welcome to investors who had become frustrated by share dilution from stock offerings.

However, I would be remiss if I didn’t share with you this reminder from Ian Bezek: “every year since 2012, Gevo’s gross margin has been negative. Consequently, it costs the company more to produce its fuels than it earns from selling them.”

With Friends Like These

I can’t blame investors for getting excited about the prospects for GEVO stock. After all, the presumption was that the Biden administration was going to make clean, renewable energy a priority. However, biofuels continue to have a complicated relationship with the rest of the renewable energy sector. 

In December, the Environmental Protection Agency (EPA) released its proposed Renewable Fuel Standard volumes for 2021 and 2022. Unfortunately, industry experts saw the move as “placing a feather on the renewable fuels pedal” precisely when the Biden administration is trying to push through bold action on climate change.

What to Do With GEVO Stock?

Purely based on its stock price, GEVO stock looks oversold. However, as I noted above whether that makes it a buy depends on your personal risk tolerance. At this point, you’re investing in a company with a business model of questionable sustainability. And in the current market environment that would be the definition of a risk-on asset.

Nevertheless, with the stock trading below $5, it might be worth a speculative investment as part of a clean energy portfolio.

On the date of publication, Chris Markoch 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 Publishing Guidelines.  

Chris Markoch is a freelance financial copywriter who has been covering the market for eight years. He has been writing for InvestorPlace since 2019. 

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