Gevo Is a Risky, Overvalued Renewable Energy Play

The shares of renewable energy companies have been rallying on the back of the Biden administration’s pro-green energy policies. One such name is Gevo (NASDAQ:GEVO) stock, whose shares have shot up roughly 800% in the past six months. It’s on a mission to disrupt the industry through its technology which transforms renewable energy sources into conventional liquid fuels.

Moreover, it’s working on its first large-scale project, called Net Zero. Gevo could be a major player in its niche down the road, but its current stock price remains a significant concern.

Gevo’s shares started breaking out in December when it was optioning 239 acres in South Dakota for a new facility. It later unveiled its Net Zero concept in January, causing its stock price to soar nearly 160% during the month.

As a result, the company’s market capitalization is nearly $1.6 billion on 2020 revenue of only $5.3 million. The hype surrounding its project is taking its stock price to parabolic levels, limiting the name’s attractiveness.

The Net Zero Project

Gevo’s Net Zero project involves the production of hydrocarbon products using renewable energy and the company’s proprietary technology. The firm expects the plant to produce up to 45 million gallons per year of liquid hydrocarbons. Once burned, the fuels are likely to have a net zero carbon footprint.

Furthermore, the company is working hard to secure a market for its products. It has been pushing hard to secure contracts and has done incredibly well in that area so far.

Its fuel contracts have a total value of $1.5 billion, and it has agreed to sell 48 million gallons per year (MGPY) of its fuel. These contracts will enable it to sell the 45 MGPY of fuel that its first Net-Zero 1 project is expected to produce annually. On top of that, it is negotiating another $600 million of contracts.

Meanwhile, it is also securing funding for the project. Its management team recently announced that Gevo had obtained $530 million of cash, while it has no significant debt. Therefore, it has enough funding to complete its first factory.

However, the projected cost of the first Net Zero facility is estimated at $700 million -$800 million. As a result, the $530 million will not cover the total cost of the plant.

However, it has plans to launch two other facilities. Thus, I feel it will definitely have to go into more debt to further its objectives.  But it will be tough for investors to lend more money to the company, considering its dismal track record in the past.

Expansion Strategy

Gevo intends to set up special purpose entities  in which it would have minority stakes. According to its plan, the other owners will pay Gevo for providing these entities with various services.   The arrangement limits the company’s risk and makes GEVO stock appear to be somewhat more appealing.

Gevo’s financial position looks relatively strong, but its massive valuation is not yet justified. Further,  its first Net Zero facility  won’t actually be complete for at least another couple of years.

The Bottom Line on GEVO Stock

GEVO stock has been on an incredible run in the past few months. Tailwinds from the Biden administration’s green energy policies, along with the company’s Net Zero project, have pushed it into the spotlight.

However, it will be a long time before the initiative generates meaningful revenue, and the company’s favorable balance sheet doesn’t justify its current stock price. The shares are considerably overvalued at this point, making GEVO stock highly unappealing at this time.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.