Some investors will see the big plunge in FuelCell Energy (NASDAQ:FCEL) stock as a buying opportunity. Others will see it as something more nefarious.
FCEL stock has dropped 68% from its highs in February. But let’s remember that a big decline doesn’t make a stock “cheap.”
Using a past price to judge current prices is a well-known investing error known as “anchoring bias.” And in the case of FCEL stock, it’s important to remember that while the stock has dropped by two-thirds since February, it has still gained 364% since Oct. 30. Couldn’t that latter price just as easily suggest that FCEL is still too expensive?
Meanwhile, seemingly every stock that falls in this market is greeted with cries of “manipulation.” But the fact is that sometimes stocks fall.
In fact, even the best growth stocks almost always see stretches of weak trading. The further out projected profits are, the more volatility you’re likely to see in the near term.
Investors can generally figure out roughly what a low-growth, mature business might earn three or five years from now. A still-speculative hydrogen play like FuelCell Energy? Projections will be all over the map, and the market’s outlook will be in constant flux.
If you’re going to consider investing in FCEL stock, you can’t fall prey to these two mistakes. You have to consider FuelCell Energy for what it is now, not what FCEL stock traded for in February or what some supposed back-room operator is doing behind the scenes.
And, from my perspective, what FuelCell Energy is now still isn’t enough to get behind FCEL stock.
Not an Easy Story
To be fair, FuelCell Energy has a big opportunity in front of it. And so it’s at least possible that FCEL stock emerges as a big winner.
Simply put, the environmental movement has won. Even Republican leaders now are voicing concerns about climate change. Businesses are looking to minimize their footprints amid the growth in ESG (environmental, social and governance) investing.
Hydrogen could be part of a greener future. Battery technology still needs to advance significantly to meet power needs for many applications, including the on-site generation offered by FuelCell Energy. Hydrogen creates zero emissions, a huge step toward reducing greenhouse gases.
But when you consider this story in the context of FCEL stock, there are two big sticking points.
The first is that hydrogen has been the future for decades now. This isn’t new technology. The principles surrounding hydrogen fuel cells have been known since the early 1800s. The gathering momentum toward greener options might be enough to believe that “this time is different,” but there’s a reason those four words are considered the most dangerous in investing.
Indeed, FuelCell Energy itself was founded in 1969. It went public in 1992.
Better Choices Than FCEL Stock
This isn’t some start-up. And yet FY2020 (ending Oct. 31) revenue was just $71 million, some 51 years after its founding. Even on an Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis, FuelCell Energy lost roughly a quarter for every dollar in sales.
50-odd years of history thus suggest some caution. But so does the competitive landscape.
It’s not as if FuelCell Energy has its opportunity to itself. Competition is stiff. Not all hydrogen companies are targeting the same end markets, but FuelCell does have direct competitors. One of them has roughly 10x the revenue and has posted better growth over the last two years.
And while FCEL shareholders are looking to a bright future, the present doesn’t look all that impressive. Revenue did grow 17% year-over-year in FY2020, but still declined roughly 20% from where it was two years earlier.
Fourth quarter results were weak. In Q1, the top line declined 9% year over year, though the prior-year quarter did see a one-time boost that affected the comparison.
All told, we’re just really not seeing much evidence that FuelCell Energy is the transformative company so many bulls hoped. And that fact, along with bubbly trading in the rally through February, is at least part of why FCEL stock has pulled back so sharply.
The pullback hasn’t happened because the market isn’t paying attention. It’s not because the stock is being manipulated.
It’s because a company with a 50-year history of disappointing seems like it’s disappointing again.
Maybe that changes at some point. Until we see some evidence that it will, this pullback can continue.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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