FuelCell Energy (NASDAQ:FCEL) stock enjoyed a tremendous run-up over the past two months. FuelCell’s stock bottomed out around 25 cents per share in November. Since then, FuelCell electrified traders, jumping as much as twelve-fold.
From the recent $3 peak, however, FuelCell has lost voltage; shares are already back under $2 and sliding quickly. FuelCell shares dumped another 15% on Monday as traders abandoned speculative stocks thanks to coronavirus fears.
Some traders might be tempted to look at the recent dip as a good chance to accumulate Fuelcell stock. But that’d be a mistake.
The company’s previous trading price down at 25 cents wasn’t a mistake, but rather an accurate reflection of the massive risks that this company faces. FuelCell’s earning report last week, which was dismal, should extinguish optimism for a near-term turnaround.
Here are three reasons why most folks have no business buying FuelCell stock here.
Weak Balance Sheet
Late last year, it seemed like FuelCell Energy might go bankrupt. Traders drove FuelCell stock deep down into penny stock territory on concerns that the company would have to reorganize.
It managed to avoid having to file bankruptcy. To get out of its fiscal crunch, however, FuelCell had to take painful measures. For one, it kept lining up new at-the-money “ATM” common stock issuances. The most recent was for up to 38 million shares when the stock was trading at just 37 cents. Over time, selling millions of shares of stocks for pennies is no way to deliver shareholder value.
The share dilution was just a stopgap measure however. The real solution came in opening a new $200 million loan facility. But it came at a painful cost. FuelCell has to pay a 9.9% cash interest rate, plus additional payment-in-kind (non-cash) interest. When it funds new tranches of the loan, it will receive a 2.5% discount up front from the stated loan amount, adding to its overall repayment burden. And if FuelCell wishes to prepay the loan early, it will face steep charges.
FuelCell escaped the clutches of bankruptcy for the time being. In doing so, however, it diluted shareholders heavily and gave away much of the future economics of its business via high-interest debt. Companies that operate for a position of weakness, as FuelCell has been doing, struggle to deliver value for shareholders.
Sector Strength Fades
Much of the run in FuelCell stock is likely because its sector has been booming. Green energy stocks in general are on fire right now. You have the electric vehicle makers such as Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) surging, and traders are searching for the next big thing. As a result, companies like Ballard Power (NASDAQ:BDLP) and Plug Power (NASDAQ:PLUG) have exploded higher.
FuelCell isn’t nearly as strong as its immediate peers though, to say nothing of Tesla. Just look at the terms of that loan FuelCell secured again if you need proof of that. This is a company that has failed to generate shareholder value in its decades as a listed company. And it was on the brink of bankruptcy just a few months ago. It’s great that FuelCell’s peers are enjoying strong momentum right now, but that’s not a good reason to stay long FCEL stock.
Downbeat Earnings
FuelCell had built a nice turnaround story between escaping bankruptcy and riding a general sector wave higher. However, its quarterly earnings release last week put a definitive end to the party. The company’s EBITDA loss jumped to more than $11 million for the quarter. Meanwhile, revenues tumbled 38% for the quarter.
FuelCell is trying to transition the business model away from near-term product sales toward recurring revenue, but given the desperate measures it has to take to access capital, management simply doesn’t have much time to try to pull off this strategic turn.
Additionally, the company’s project backlog came in at just $1.3 billion. The company had hinted that the figure might top $2 billion in November, so that’s a massive disappointment. Adding insult to injury, FuelCell claims that its partner, Posco (NYSE:PKX) breached a contract and misappropriated its intellectual property.
FCEL Stock Verdict
FuelCell has enjoyed a ton of hype and excitement over the past few months. For shareholders, it has been exhilarating watching the company successfully fend off bankruptcy and get its share price out of penny stock land.
Don’t mistake the positive short-term movement for a successful turnaround, however. FuelCell has a ton to prove before it we can consider it a solid long-term investment. And with its onerous new loan, it will have to pay a lot more interest going forward, making profitability that much more difficult to achieve.
As folks realize that FuelCell has more operating losses ahead of it, expect the share price to continue to deflate.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
