Broader Economy Signals Tough Times for FuelCell Stock

I don’t dislike FuelCell (NYSE:FCEL). But I have a really hard time getting excited about the stock. There’s no question that alternative energy is a viable and growing segment. But that doesn’t mean that every fuel cell stock is worth your time or trouble. And unfortunately even as FuelCell is decreasing its operating expenses, it is still struggling to generate consistent revenue.

In its earnings report on March 16, the company reported a 9% year-over-year revenue decline. FCEL posted $16.3 million in the first quarter of fiscal 2020 versus the $17.8 million the company posted in the first quarter of 2019.

This is showing that the company is not yet getting the expected bump from its recent joint venture with ExxonMobil (NYSE:XOM). The company is expecting to realize $60 million from the deal which nearly matches the company’s revenue for all of 2019. And the reason why that’s problematic has to do with the current state of energy stocks.

These are not the best of times for energy stocks

Despite the Trump administration announcing a major oil purchase to fill up the United States Strategic Oil Reserve, the price of oil continues to decline. That is not only making the math tough for oil companies (particularly those of the shale variety), but it’s creating an added problem for the alternative energy segment.

It’s impossible to speculate when the economy will begin to recover from the effects of the coronavirus. But when it does, it certainly appears that fossil fuels will be leading the way. And that’s bad news for alternative energy stocks.

That’s unfortunate because FuelCell actually may be on the verge of a major breakthrough.

FuelCell has an innovative way to catalyze hydrogen

One of the fallacies of alternative energy is the belief that simply being aware of the issue of climate change is sufficient for the public to accept an alternative energy solution. However, according to the group, “Experience shows that potentially useful technologies will not be considered if the public is unfamiliar with them, so that many new and existing technologies are not used.”

For many years, the unfamiliarity and impracticality of refining hydrogen into fuel made the promise of FuelCell and another hydrogen company PlugPower (NASDAQ:PLUG) impractical. The issue is that the most cost-effective way to refine hydrogen into fuel is through natural gas reforming. This “blue hydrogen” involves fossil fuels and releases carbon dioxide into the atmosphere. This reliance of traditional fossil fuels is one of the societal hurdles that a company like FuelCell has to overcome.

Because they can withstand the acidic conditions inside the fuel cell, platinum and platinum alloys are the most efficient way to catalyze hydrogen fuel cells. But platinum is expensive which has made it impractical to use hydrogen in large-scale applications.

However, it appears that FuelCell is on the verge of a breakthrough. In a recent white paper, the company announced that the high temperatures used in its proprietary catalyzing process are allowing it to completely replace platinum with a porous nickel catalyst. In theory, this should make FCEL stock a great investment.

However, when I look at the big picture for FCEL stock, I see a company with falling revenue and a dwindling stockpile of cash.

The company’s total assets now include a large increase in property, plant and equipment. The financials also show a small, but noticeable bump in intangible assets.

What this implies is the company is building out an infrastructure and has debt to pay off. And how are they paying it? It’s obviously not cash. The company reported entering an 8-year $200 million secured credit facility with Orion Energy Partners Investment Agent, LLC. The company took two draws, totaling $80 million.

What Does the Future Hold for FCEL Stock?

I understand the attraction of FCEL stock. The company is in the renewable energy sector. The share price is so inexpensive that a little lift in the share price will go a long way. However, with a price/sales ratio of around 4.6 as of this writing, FCEL stock still appears to be a little overvalued.

And the problem for the company is that the deal with ExxonMobil points to a larger problem for the company. It relies on megadeals. And as the economy will look to recover after the disruption of the coronavirus, speculation in alternative energy stocks may dry up.

And that means I’m doubtful that the company will continue to generate consistent revenue. And without that, it’s hard to bet on the company’s short-term growth.