It’s Time to Admit the Bears Are Right, and Dump FuelCell Stock While You Can
FuelCell’s (NASDAQ:FCEL) fourth-quarter results were very disappointing and revealed that FCEL stock is tremendously overvalued. With most Wall Street analysts having negative outlooks on the company and its growth still weak, I believe that the stock is bound to drop sharply over the longer term.
Euphoria about alternative fuels in general, and hydrogen in particular, have resulted in a tremendous unwarranted rally in FuelCell stock.
While the surge of multiple solar names, as well as EV play Plug Power (NASDAQ:PLUG) are justified, (due to the proliferation of solar energy and hydrogen vehicles, respectively), FuelCell’s jump over the last year is quite inexplicable.
That’s because, as the company’s Q4 results show, there is no meaningful boom in demand for fuel cells for use in generating electricity for buildings.
A Closer Look at FCEL Stock
As FuelCell was eager to point out, its revenue rose 54% year-over-year in Q4 to $17 million, but its sales only increased by $6 million YOY. For FCEL stock, whose market capitalization is $6.5 billion, a $6 million YOY increase is insignificant.
Nor does the company’s top-line figure of $17 million come anywhere close to justifying the stratospheric valuation of the shares. In fact, FuelCell’s 2020 revenue came in at $71 million, meaning that its trailing price-sales ratio is an unbelievable 91.5.
And it gets worse. One would think that, if a company with that type of valuation wasn’t profitable—and FuelCell isn’t—its growth would really be awesome on all fronts. But in 2020, the company’s top line rose a paltry 17% (or about $10 million), while its backlog actually dropped by 2.5%.
On a positive note, FuelCell is finally taking a step to benefit from the coming hydrogen-vehicle boom. Specifically, CEO Jason Few reported on its earnings conference call that it’s installing a hydrogen production platform in Long Beach, Calif. The platform will be the first of its kind from the company and Toyota’s zero-emission fuel cell cars and trucks.
Few indicated that the company could use its existing products to produce hydrogen. Still, while it’s encouraging that FuelCell is moving in this direction and that Toyota (NYSE:TM) is using its hydrogen, it’s too early to say if the strategy will be successful. It doesn’t come anywhere near justifying the huge valuation.
Meanwhile, multiple sell-side analysts are generally unenthusiastic about FuelCell and FCEL stock.
Multiple Analysts Are Bearish on FCEL Stock
On Jan. 14, JPMorgan cut its outlook on FuelCell’s shares to “underweight,” the equivalent of a “sell” rating, saying the stock is “richly valued.” The firm set a $10 price target on the name.
And, as Will Ashworth noted in his Jan. 15 column citing The Fly, Jefferies opened its FCEL coverage with a “hold” rating. It set an $11 price target. Jefferies holds that FuelCell’s positive attributes, which include a favorable political climate and the cash FuelCell recently raised from a stock sale, were reflected in the shares.
Finally, on Dec. 9, thedeepdive.ca reported Canaccord Genuity started coverage of the name with a “hold” rating.
“We believe FuelCell Energy has great promise in the grey/blue hydrogen markets for on-premise backup and direct gen solutions,” he said, “but the recent tripling of the stock over the past month suggests to us that investor enthusiasm has likely exceeded fundamentals in the near term.”
On Jan. 22, Canaccord hiked its price target on FCEL stock to $15, but maintained a “hold,” citing valuation.
Also very telling is that, out of the five analysts who cover FuelCell, four rate it “hold” or the equivalent, one has a “sell rating or the equivalent, and zero has a “buy” rating or the equivalent.
The Bottom Line on FuelCell Stock
With the shares now trading at a gargantuan valuation and the company still generally growing slowly, I continue to recommend that investors sell the name.
On the date of publication, Larry Ramer held a long position in Plug Power.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.