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But not so fast! “Green economy” shares can retain their value even in today’s volatile market. But when it comes to FuelCell Energy, there are too many red flags to see it as an opportunity.
Like Plug Power (NASDAQ: PLUG), FuelCell is making progress in registering large companies for its renewable energy technology. As you may know, I have long been skeptical of Plug Power’s long-term prospects.
When it comes to FCEL shares, I am even more hesitant. FuelCell has even more limited financing options. Shares are also traded at a higher company value / sales ratio (EV / sale) than Plug Power.
In short, FCEL stocks are not the strongest “green wave” stock for your portfolio. Still, stock volatility can make it difficult to get on the other side of this name. With this in mind, let’s dive in and see what’s the deal with FuelCell Energy stocks.
What else is in the pipeline for FCEL shares?
A major catalyst for FCEL shares of late was the company’s partnership agreement with Exxon Mobil (NYSE: XOM). This deal not only shows the potential demand for FuelCell’s carbon capture technology. It can also help the floundering company to arrange its financial house. As Chris Lau of InvestorPlace discussed on February 26, this deal helps reduce operational risks. With this partnership, Exxon Mobil mainly subsidizes FuelCell’s research and development costs.
But what else does it play with FCEL shares? As InvestorPlace’s Vince Martin discussed on February 24, FuelCell’s new strategy is to focus on long-term PPAs (or Power Purchase Agreements), as opposed to one-time product sales. This may explain why sales hit during the last quarter of 2019. But outside the Exxon Mobil deal, FuelCell lacks other game-changing catalysts.
All games are suspended if FuelCell can secure more Exxon Mobile offers. Nevertheless, this has not prevented investors from continuing to give the FCEL share a rich valuation. Add potential headwinds related to financing, and there is more to be wary of FuelCell Energy stocks.
Funding challenges may limit FuelCell’s growth
In my previous analysis of FCEL shares, I wrote down the company’s financing issues. Much of the attention can be paid to the company’s $ 200 million financing agreement with Orion Energy Partners. But the company can hit a wall that raises more capital.
FuelCell was able to secure the deal by issuing warrants. The deal was not very dilutive. But unlike other speculative growth names, FuelCell can only be diluted so far. Why? The company’s self-imposed ceiling of 225 million outstanding shares. With the Orion deal, the FCEL share now has approximately 211 million outstanding shares.
As the company is unprofitable, FuelCell will need more financing if it succeeds in securing the sale of needles. To secure this financing, it is likely that the company will need to issue warrants to attract potential debt investors. As the company can currently only issue an additional 14 million shares, this will be a challenge.
This explains why FuelCell’s next annual meeting includes a vote to expand the number of shares. If approved, the company can increase the number of outstanding FCEL shares to 337.5 million shares.
Last year, shareholders voted against this change. But this year, FuelCell’s management can make a stronger fall. Issuing more FCEL shares would affect the share price in the short term. But the company can not drive growth without more capital.
Valuation another important concern for the FCEL share
With potential growth limited by the outstanding share ceiling, one would think that FCEL shares would sell at a lower valuation than Plug Power. Yet this is not the case. The FCEL share is traded at an EV / sales ratio of 9.6. Plug Power is traded at an EV / sales ratio of 8.8. And this is with Plug Power, which is overvalued, with stronger prospects than FuelCell.
Granted, this valuation deviation may not matter in the grand scheme of things. If FuelCell can secure another headline agreement, shares can soar. It is difficult to use traditional valuations for stocks such as Fuel Cell or Plug Power. Less than a year ago, Plug Power did not look like a good opportunity in terms of value. Yet shares have more than doubled since then.
FuelCell shares may surprise, but look for other opportunities
Given the number of factors working against FCEL shares, it is difficult to justify when buying at today’s price levels. Still, it may be uncertain to short FuelCell around $ 2 per share. With speculative interest in green stocks such as FuelCell, stocks can soar after a game-changing deal.
It is short, FCEL shares are too overvalued to buy, but too uncertain to short. In short, the best thing is to look for opportunities elsewhere. Renewable energy stocks as a whole are overvalued. But FuelCell shares offer an even less promising proposal.
Thomas Niel, contributor to InvestorPlace, has been writing a one-share analysis for web-based publications since 2016. At the time of writing, Thomas Niel had no position in any of the above-mentioned securities.