Down More Than 35% Year to Date, Should You Buy the Dip in FuelCell (FCEL)?

At the beginning of 2021, things for the integrated fuel cell developer Fuelcell Energy Inc. (FCEL) looked promising. Then, the stock crashed to $5.58, from its February high of $27.96. Today I’ll analyze FCEL to determine if this pull-back is a buying opportunity or not. 

FCEL engages in manufacturing fuel cell technology platforms for power generation. The company offers various fuel cell products, which are used for multi-megawatt utility applications, microgrid applications, distributed hydrogen or use their thermal attributes for on-site heat and chilling applications for a broad range of applications. The company’s Carbonate Fuel Cell technology generates electricity directly from a hydrogen-rich fuel, such as natural gas or renewable biogas, by reforming the fuel inside the fuel cell to produce the needed hydrogen. 

Interest in hydrogen fuel-cell technology has increased in recent years, as the transition to zero carbon emissions quickens. More and more carmakers are looking beyond electric battery vehicles and are raising their investments in this technology.

Since the beginning of the year, FCEL dipped a whopping 38%, underperforming the iShares Global Clean Energy ETF (ICLN), which lost 19.5% year-to-date.

FCEL is investing massively to lift its top line, but the company is a long way from being profitable

FCEL’s top-line growth appreciated by 8.2% year-on-year to $767m in 2021, as the fuel cell specialist lifted significantly CAPEX over the year, up to $599m in 2021 from $39m in 2020. Nevertheless, the company is struggling to generate a positive free cash flow. In the past years, free cash flow has oscillated around a negative figure of $400m yearly and with current prospects, analysts expect a deterioration of FCEL’s cash flow generation in 2022 and 2023 to -$480m and -$499m, respectively.

During the quarter, FuelCell started commercial operations at the 1.4-megawatt biogas project in San Bernardino, California, and commenced the commissioning process of the 7.4 MW platform in the U.S. Navy Submarine Base in Groton, Connecticut. Due to an elevated temperature found inside a component on one of the two installed plants, FCEL suspended the Groton commissioning, expecting to resume it in late September.  

In addition, the company’s total costs and expenses increased to $11.7 million during the quarter, from $7.6 million the prior year, on higher research and development expenses as well as administrative and selling costs.

In 3Q2021, the company posted a net loss of $0.04 per share, slightly outpacing analysts’ estimates of $0.05 per share. FCEL surprised on revenue guidance, beating analysts’ estimates by $6.19m to $26.86m in the quarter. Nevertheless, the fuel cell company has consistently missed analysts’ earnings and revenue expectations in the past, strengthening the selling pressure that has brought the stock price to recent lows. 

High competition in the renewable market and FCEL’s habit of issuing new shares to sustain its operations, explaining it’s unfortunate stock performance

FCEL is evolving in a competitive landscape that provides low margins. Notwithstanding other fuel cell manufacturers such as Bloom Energy (BE), significant competition from traditional and other renewable energy sources, which is weighing on the company’s growth prospects.

With higher operating costs compared to its competitors, there is no surprise that the company is struggling to deliver a profit. The company is expected to incur a net loss of $876m in 2021. Its EBITDA has been negative in the past three years and analysts do not expect it to turn positive until 2023. 

Interestingly, analysts are expecting an improvement to the company’s balance sheet, as the company transitions from a net debt position to a net cash position of $384m in 2021. Despite that, the company more than doubled shareholder equity in the past year, from $135m in 2020 to $295m in 2021. This has drastically diluted current shareholders, sending FCEL’s stock price downward. 

After losing nearly half of its market capitalization, investors might expect the price of FCEL to be cheap. Yet, with a 2022e EV/Revenue of 17.2x and a 2022e P/B ratio of 100x, the company remains expensive given current financials. 

Conclusion

Some investors might view the sell-off in FCEL as a buying opportunity but I do not. I believe that risks are lingering and that selling pressure will continue, as their financials continue on this downward path. FCEL is operating in a highly competitive market and is struggling to deliver a net profit. With its history of issuing new stock to fuel its growth, shareholders’ equity is diluted, bringing additional selling pressure on the stock price.