Investors in FuelCell Energy (NASDAQ:FCEL) have waited over a decade for good news. All they got in Q2 was another $15 million loss to add to their $1.1 billion accumulated deficit. Shares dropped -18%.
Please. I’m asking. It’s time to stop throwing good money at bad stocks.
FuelCell may have been a promising startup in 2001. At its peak, the company reached a $1.5 billion valuation as investors from Enron to the U.S. Navy rushed to the clean-energy company.
But those days are long gone. Today, FuelCell stares down the barrel of bankruptcy while its former competitors shine. It’s time for the last stakeholders to throw in the towel before the stock hits $0.
FCEL Stock: Gambling on a Turnaround
Don’t get me wrong. The clean energy revolution will change the world. But every growth industry goes through a consolidation after its boom.
Take the smartphone industry: in 2012, there were eight major smartphone manufacturers. Today, that number has narrowed to five. Though that hasn’t stopped fans of the Blackberry eyeing a 2021 revival.
But would you bet all your money on a Blackberry comeback? Probably not. And neither should you with FuelCell.
Studies have shown that turnarounds are unusually rare in the corporate world. According to a widely cited Harvard study, distressed companies typically underperform by negative -16.1% per year.
“Hope”: The Most Dangerous Word in Investing
Yet some investors continue to hold out hope for FCEL. Some are tempted by “confirmation bias,” a common error that causes people to seek self-confirming evidence. Others are swayed by “anchoring bias,” and assume FCEL’s peak price of $7,000 makes its current $2.26 value look cheap.
But don’t be fooled. FuelCell today isn’t the FuelCell of 2001.
In Q2, the company generated just $7.1 million of service and license revenues and $4.7 million of power generation revenues. As for product revenues? Zero, according to SEC filings.
Over the years, FCEL has slowly lost partners. POSCO Energy, one of its largest, stopped buying kits in 2016. Its 3% royalty agreement has been stuck in arbitration ever since. That’s not a sign you want from a critical relationship. NRG Energy, another major investor, allowed its $40 million revolving credit line to expire in 2019.
“FuelCell has been reduced to a shell of the company it was,” Bloomberg wrote last year, “all but crushed by the economics of solar and wind power and outgunned by rivals including Bloom Energy Corp. that offer more flexible and less bulky systems.”
How did FCEL Fail?
The company never fully recovered from a “death spiral” that started in 2004. That year, FuelCell lost a record $86 million after failing to replace its 2002 contracts with new major projects. Its finances would never look quite the same.
As its cash position weakened, its Altman-Z score, a measure of solvency, plummeted to 0.44. (Any score below 1.8 foreshadows an upcoming bankruptcy).
The financial stress meant that FCEL had to divert resources to shoring up its balance sheets rather than on R&D or marketing. R&D spending declined from 83% of revenues in 2004 to just 6% in 2019.
Executives didn’t help much in the process. Before getting fired in 2019, CEO Arthur Bottone and his executive team earned $3.6 million, more than double what they did in 2011.
Can FCEL Stock Make a Comeback?
Bottone’s replacement, CEO Jason Few, faces a massive uphill battle. With an R&D budget of only $1 million per quarter, FCEL needs a miracle-worker to catch up to rival Bloom Energy (which spends 18 times on R&D). Adding to the problems is FCEL’s massive cash burn. The company laid off 135 of its 450 staff last year, but still bled $61 million of cash.
These issues have forced FCEL to sell their intellectual property (IP) on the cheap. In June 2019, the company gave ExxonMobil (NYSE:XOM) unlimited, perpetual rights to its SureSource Capture for just $10 million. The two companies later amended the deal to include $45 million in FCEL R&D spending, and a path for FCEL to license back its technology.
Perhaps this is a blessing in disguise. FCEL stock jumped from 13 cents to $2.00 on hopes the Exxon deal would create a significant technological breakthrough. And one could still appear.
But insiders haven’t been waiting to find out. Since 2019, corporate insiders have kept their stock balances low, with insider ownership less than 3% of the micro-cap company.
FCEL Stock Probably Worth $0
As much as I like growth industries, not every company will survive. Even startups with original ideas and excellent management can still run into issues along the way.
FuelCell, on the other hand, hasn’t seen a blowout success in almost two decades. Its investors and backers have dropped out one by one, as FCEL technology failed to prove itself.
Hopeful investors could keep throwing money at FCEL stock. Its big breakthrough product could be around the corner. But realistically, it’s a longshot. Unless FCEL manages to discover a market-beating product soon, shares are heading straight back to $0.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.