FuelCell Energy Ignites Short-Covering Rally, Don’t Buy Into It

Key Points

• FuelCell Energy beat analysts' consensus, but the bar was low, and revenue was tepid. 
• GAAP losses per share were better than expected and down from last year due to an increased share count: losses widened. 
• Analysts rate this stock at Reduce and are unlikely to change their tune soon. 

FuelCell Energy NASDAQ: FCEL is up a solid 20% following its latest earnings release on dubious news and hope. The move confirms a technical reversal in the share price, but the report's detail belies the technical outlook. The downtrend will likely continue because the stock is well below its downtrend line, with losses widening. The takeaway is that FuelCell Energy's stock price is heading higher now, but the ceiling is in sight, and another selling opportunity is developing. 

The short interest is a likely culprit for the post-release sell-off. The short interest was over 22% at the last report and sufficient fuel for a short-covering rally, if not a squeeze, so it looks like we have a squeeze in play. The squeeze could last several days, but it is not a reason to buy into this energy stock now. 

FuelCell Has Better-Than-Expected Quarter

FuelCell had a better-than-expected quarter, but that is not to say it had a good quarter. Revenue of $22.2 million is nearly 700 basis points above the consensus reported by MarketBeat but still down almost 42% compared to last year. The weakness is due entirely to a near-100% decline in service revenue due to the lapping of last year’s module exchanges with Korea South Power. The generation segment revenue increased by 65% as the generation base grew, and Advanced Technologies nearly doubled on new contracts. 

The margin news is mixed. The headline is that losses narrowed, but that is not the real story. GAAP per share losses narrowed slightly and outpaced the consensus by a penny, but due to an increased share count, there was no operational excellence. The share count is up 11% on average compared to last year, which is the only reason the GAAP losses narrowed. The company’s gross loss, operating loss, and adjusted operating losses widened compared to last year, resulting in a capital drain on the balance sheet. 

The balance sheet is still capitalized, but there are some red flags. Lack of profits aside, the company’s cash and equivalents balance is declining, assets are declining, debt is up, and liabilities are growing. The net result is that shareholder equity was reduced by 6% in addition to the 11% dilution, which is a serious headwind for the stock price. The report highlights bolstering the balance sheet with share sales (which investors should expect to continue) and debt financing for newly online projects. 

Analysts Aren’t Fired Up About FuelCell Energy 

Analysts are not fired up about this stock; instead they have left it for dead. The most recent update tracked by MarketBeat.com was issued in Q3 2023 and is a Hold with a $2 price target. That target implies more than 100% upside for this Sell-rated stock but does not reflect the recent results. Because the company is slow to gain traction and losses are mounting, analysts will unlikely change their tune soon, which will provide another headwind for the market. Institutional interest is also sketchy. The institutions own about 43% of the stock but have been selling on balance this quarter, and most of the holdings are for exchange-traded funds. 

The price action in FCEL stock is attractive, but there are risks. The market shows a Head & Shoulders on the brink of confirming reversal, but it shows resistance at the critical level, and the downtrend is still intact. The critical level is near $1.00, consistent with the pattern neckline. Failing to move above this level would confirm the downtrend and keep this name in penny stock territory. A move higher would confirm a reversal, but with the 150-day moving average at $1.15, the reversal may not go far. The 150-day EMA has been strong resistance since 2021 and is unlikely to break now.