The previous lack of successful biofuels in developed nations and Gevo’s (NASDAQ:GEVO) high valuation are both factors that make me cautious on GEVO stock. The company develops low-carbon renewable fuels from plant sugars, but I’m not sure it’s a sustainable buy.
Other worrisome trends for the stock include the apparent lack of biofuel-enthusiasm surrounding it — among most governments and environmentalists — as well as the reduced momentum of speculative stocks in general.
Because of these points, I recommend that investors sell Gevo’s shares. And that’s even though I think this company has a great deal of potential.
GEVO Stock and the Lack of Success in Biofuels
The idea of using biofuels to power vehicles is far from new. In fact, way back in 1975, “90% of all new vehicles sold in [Brazil] could run on ethanol” derived from sugarcane, according to the Rapid Transition Alliance.
Yet, despite some years of very high oil prices in the 2000s and increased concerns about greenhouse-gas emissions, developed nations have never really embraced any biofuel on a wide scale.
Why? Perhaps that’s because of concerns that doing so would greatly harm the fossil-fuel and electric-vehicle industries and also cost automakers a great deal of money.
Whatever the reason, though, the failure of biofuels to make an impact in the past makes me worried about GEVO stock’s outlook — both medium- and long-term.
No Love for Biofuels, Too Much Love for GEVO
Another concern with Gevo is that, even now, both governments and leading environmentalists do not seem very enthused about biofuels.
While these groups are obviously embracing solar energy, wind energy, electric vehicles (EVs) and even hydrogen, biofuels are lacking support. Therefore, I am not convinced that governments will massively subsidize Gevo’s products. I’m also unconvinced that many companies — who respond to public opinion, including environmentalists — will look to utilize Gevo’s offerings.
Yet — after climbing over 425% in the past one year — GEVO stock’s valuation is also rather high. In fact, its market capitalization is a hefty $2.2 billion. Meanwhile, two analysts covering the shares expect the company to generate just $6.4 million in revenue this year. On Seeking Alpha, the company currently has a stratospheric forward price-sales ratio of 381.84.
Some Strong Potential
All that said, some airlines and other companies have shown a great deal of interest in Gevo’s biofuels.
For example, after originally signing a deal to buy Gevo’s fuel in 2019, Scandinavian Airlines recently agreed to increase its “minimum purchase obligation” to 5 million gallons per year.
On top of that, in August 2020, Indian engineering giant Praj agreed to license technology from Gevo.
So, GEVO stock does have potential for the future. Airlines could come under increased pressure to become “green” and respond by widely uptaking Gevo’s fuel. However, that possibility may not be enough for this name.
The Bottom Line
As interest rates rise and the economy appears closer to fully reopening, investors are shying away from highly speculative stocks. Given its huge valuation and uncertain outlook, GEVO stock certainly fits in that category.
Meanwhile, with the history of biofuels in developed countries and the failure of both governments and environmentalists to embrace them, it’s hard to determine whether Gevo can succeed long-term.
So, I urge investors to sell their shares. You should only consider buying GEVO again after the stock drops substantially and the company’s visibility has meaningfully increased.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 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, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.