Some penny stocks go on to deliver huge returns for their owners. Most, however, do not. After all, companies usually end up in penny stock territory because something dramatic has gone wrong with their business model.
At times, these issues can be resolved. In others, however, little chance of a revival exists due to a poor business model, weak management, and/or a troubled balance sheet.
In the case of these three penny stocks in particular, their prospects seem almost hopeless given the large operating losses and questionable business prospects.
Canopy Growth (CGC)
Cannabis company Canopy Growth (NYSE:CGC) has seen its share price double since the start of September. This has come about, in large part, due to a renewed round of speculation around a reclassification of marijuana.
Specifically, by lowering the restrictions around marijuana, it would allow U.S. marijuana companies to operate legally from a federal perspective, giving benefits such as access to the banking industry.
That’s good news for marijuana companies in general, but it’s unlikely to save the day for Canopy in particular. Canopy’s business model failed to ever take off. The firm has run gargantuan losses. Recently, the company disclosed a going concern warning, indicating that it could go bankrupt in the intermediate future if things don’t turn around quickly.
Canopy’s revenues peaked at $435 million in fiscal year 2021 and plunged to less than $300 million in fiscal year 2023. Meanwhile, it has a negative gross margin, meaning it costs the company more to produce its marijuana than it earned from its sales.
Even if legalization actually happens this time, it wouldn’t move the needle to save Canopy. Unfortunately, CGC’s failed business model, falling revenues, and sickly balance sheet make for a perfect storm.
FuelCell Energy (FCEL)
FuelCell Energy (NASDAQ:FCEL) is a company attempting to commercialize stationary fuel cell platforms.
So far, FuelCell appears to be more of a science project than a viable business. The company is currently generating a negative gross margin on its sales, meaning its costs outweigh its sales. This is not a sustainable way to organize a business. Adding insult to injury, analysts see no path to profitability, with the current analyst earnings projection showing FuelCell will remain unprofitable through at least 2030.
That’s nothing new for FuelCell, however. The company has been publicly-traded since 1992. Shares peaked at more than $6,000 per share (on a split-adjusted basis) back in 2000. Regardless, FuelCell has plowed ahead, losing a net total of more than $1.4 billion since the firm’s inception.
Although breakthroughs in renewable energy technology for decarbonizing industrial processes will be realized, it’s just not in the cards for FCEL. It’s had more than thirty years in its field yet has proven to be a commercial failure. The path ahead seems likely to deliver more of the same. This means heavy losses, massive dilution, and an ever-falling share price.
Nikola (NKLA)
Nikola (NASDAQ:NKLA) may have taken the phrase “crash and burn” a little bit too literally.
Specifically, Nikola’s electric vehicles have shown a concerning propensity to blow up. As Electrek recently reported, “Nikola trucks can’t stop catching fire“, with a fourth separate Nikola vehicle fire incident occurring recently. In August, Nikola recalled 209 of its battery-electric vehicles (BEVs) due to problems with the battery. That came amid reports of various fires provoked by Nikola vehicles throughout Arizona.
Traders might point out that NKLA stock has already plunged over the past month. However, I’d counter that by saying that even in penny stock territory, Nikola shares are still dramatically overvalued.
Due to massive amounts of dilution, Nikola has a rather generous $750 million market cap today. That seems extremely high for a company with almost no revenues and whose few vehicles tend to get recalled and/or catch on fire.
On the date of publication, Ian Bezek 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.
