FuelCell Delivers in the Present, But It’s All About the Future

Shares of FuelCell Energy NASDAQ: FCEL stock are moving higher yet again. At the opening of trading on June 12, FCEL stock is up over 25%. The catalyst is an earnings report in which the alternative fuel provider beat on both the top and bottom lines. The stock is now making a run at its 52-week high which was set just two days ago on June 10.

FuelCell Has Had a Great Quarter

The last two months have been very good for FuelCell. Since March, FCEL shares have climbed over 200%. Even with a sharp pullback on June 11, a move that followed the trend of the broader market, FuelCell shares were still holding an impressive 136.7% gain since March.

And FuelCell stock was posting a year-to-date gain of over 28% in advance of what is expected to be a surge following its earnings report.

However, the roller coaster movement of the stock illustrates the volatility that still exists regarding fuel cell technology. FCEL stock is having a good year, but it hasn’t been a smooth path. The stock, which sits at $3.11 as of this writing, has been as low as $1.09.

And that’s why investors should proceed with caution in terms of buying FCEL stock. The run has been impressive, it also may be pricing in the best outcomes. And those outcomes may not be a sure thing.

The FuelCell Model is Complex

Investors like to lump fuel cell companies into the same category with all renewable energy stocks. But that’s not quite accurate when it comes to FuelCell. The company’s fuel cells operate on natural gas or bio gas. Even for hydrogen fuel cells, like those run by Plug Power NASDAQ: PLUG, the lack of a widely available hydrogen infrastructure means companies have to rely on natural gas as their base fuel stock.

And fuel cells work in tandem with traditional batteries. The fuel cells outputs electrons to a motor that will power the vehicles. This makes improved battery technology both a necessity, and a competitor for fuel cells.

The Price of Oil Can Still Affect FuelCell

One of the key drivers of revenue for FuelCell was an increase in its Advanced Technologies sector. And this showed the continuing revenue the company is receiving from its two-year $60 million carbon capture deal with ExxonMobil NYSE: XOM.This segment accounted for 32% of the company’s revenue in the company’s most recent fiscal year.

One of the concerns is this. While FuelCell is not directly affected by the price of oil, ExxonMobil is. And right now, there’s no assurance that, at a time when Exxon is going to struggle to pay its dividend and keep its exploration operations intact, it’s shareholders will be keen on the company paying FuelCell millions of dollars.

In the first quarter, FuelCell acknowledged that the deal with Exxon accounted for the vast majority of its $5.2 million of sales in the Advanced Technologies sectors. So far, it appears that Exxon is maintaining, and possibly increasing, its investment. Revenue for the Advanced Technologies sector increased to $7.3 million.

However, the earnings report covered the quarter ending April 30, 2020. Oil prices remain volatile and suffered a pullback on June 11 along with the broader market. The takeaway is this. ExxonMobil is providing a significant amount of the company’s revenue. If Exxon needs to make cuts, it may very well decrease its funding to FuelCell.

The Company Still Requires a Lot of Debt to Keep the Business Running

In its earnings presentation, the company indicated that it had procured up to $35 million in funding under the company’s $200 million Orion Energy Partners facility. The money is available at FuelCell’s discretion for general corporate purposes and working capital. All of this is to enhance the company’s current liquidity.

The company already drew down $80 million from the Orion facility in 2019 to help start construction on current projects.

This is a recurring theme with FuelCell. There are tantalizing possibilities, but right now the company needs to tap the debt markets to maintain liquidity. To be fair, the $35 million in funding should be enough to keep the company solvent throughout 2020. But, it’s still a source of concern that the company is not yet standing on its own two feet.

Is that realistic? Perhaps not. But investors have to ask, if not now, when?

Is FuelCell Stock a Buy?

Right now, FuelCell shares are inexpensive, but that doesn’t mean that they’re a good value. As a speculative bet, the company may be attractive if the stock drops a little bit. But for long-term investors, I would want to see FuelCell repeat this performance. And I would particularly want to get more clarity on the direction of the overall economy specifically as it relates to the oil markets.

Right now, I think FuelCell may be flying too high too fast. Even as I finish this article, the stock has given back nearly all of its earnings report-inspired gains. This suggests analysts may be having similar questions about FuelCell.