FuelCell Is Back To Realistic Valuation

Key Points

• FuelCell issued a mixed report with widening losses that sent the shares higher. 
• The company's large-scale projects are about to come online, and interest is building for carbon capture technology. 
• The analysts see an upside for the stock and may catalyst a rally later in the year once revenue begins to ramp higher. 

After surging more than 1000% and giving up every bit of the gains, the shares of FuelCell Energy NASDAQ: FCEL are back to a realistic valuation. The stock is trading even with the pre-boom price point of $2.30, which makes it an attractive buy, given its progress over the past 2 years. The company was forced to cut back on plans in 2022, but the projects still underway are nearing commercial operations.

Those include the Toyota Project in Long Beach, built aside the port terminal facility to power Toyota’s campus, and 2 projects in Connecticut. Once completed, the company’s revenue growth should accelerate, which should drive interest in the company, if not higher prices for the stock.

FuelCell Stabilizes On Mixed Result And Hopes For Commercial Operations

FuelCell had a mixed quarter, but there are too many one-off factors to count; the headline strength and margin weakness don’t mean what they might. The company reported $38.3 million in net revenue in Q2, which is up 133.8% compared to last year and beat the consensus estimate by more than 2500 basis points. 

The strength was driven by a gain in the Service segment due entirely to the KOSPO account in South Korea. That revenue is from module exchanges completed in the quarter that were not performed in the previous year and are not expected to recur soon. The other segments, Generation and Advanced Technologies, declined, with Advanced Technologies down 20%, but neither is the real driver of long-term shareholder value. That’s the revenue generated by large-scale projects slated to come online this year. 

The margin news is also iffy. Given the top-line strength, the company reported a much wider-than-expected loss, but there are offsetting factors. Those include increased headcount and R&D spending associated with completing large projects and technological advancement investments. The takeaway is that the news did not alter the analyst's long-term view; all hopes are still pinned on the completion of large-scale projects. 

Analysts Hold FuelCell: 50% Upside Is Possible 

The analysts haven’t had much to say about FuelCell since the end of last year, which did not change with the Q2 results. However, the 5 analysts with ratings have it pegged at Hold with a price target 50% above the recent action, so there is some bias to the data. The institutions are also buying the stock, helping the market to put in a bottom. The institutions own about 42% of the stock and have bought in the ratio of almost 4:1 versus selling, and their activity picked up in Q2. If this continues into the summer, the stock could easily consolidate at the current levels and possibly move higher.

One factor that may provide a headwind to upward price movement is the short interest. The short interest is high at 16% of the float and a driver of volatility, if nothing else. At worst, this will lower the stock with a chance of finding support near recent lows; at best, it will lead to a short-covering rally or squeeze, but that won’t come until there is news of projects (Long Beach will be first) beginning commercial operations. 

The Technical Outlook: FCEL Market In Wait-And-See Mode 

The market for FCEL stock may have bottomed, but a rally should not be expected soon. The market is in a wait-and-see mode that will not end until commercial production starts or we find out why not. Until then, this stock will likely move sideways within a wide range with a floor near $2.00. If the floor at $2.00 doesn’t hold, this stock could be heading for the penny stock dumpster.