Shares of FuelCell (NASDAQ:FCEL) are dropping after a poor earnings report. The company reported $18.7 million in revenue for the quarter. This was a stark 18% decline from the previous year. However, it also represented a drop from the prior quarter. But that alone was not the reason that FCEL stock is declining.
During the company’s conference call, it reported that it had conducted a $75 million open market share sale in June. This increased the company’s share count by 20%. But the news gets worse for FuelCell investors. And while it doesn’t deliver a fatal blow to the company, it crystallizes the fundamental problem that exists for fuel cell technology.
Trick or Treat
According to the 10-Q form that FuelCell filed prior to its earnings report, it will likely have to issue another open market share sale before FuelCell’s fiscal year ends on Oct. 31, 2020. And the language in the 10-Q could not have been more direct. FuelCell will need to execute the sale to “alleviate substantial doubt in future periods.”
This means that although FCEL stock is already absorbing a 20% dilution in the prior quarter, there will be more dilution. And that’s means that instead of getting a sweet return this Halloween, FuelCell investors are likely getting a rock.
The Problem with Being First
FuelCell like all other hydrogen fuel cell providers face a monumental challenge. As it stands today, less than 12% of U.S. energy production comes from renewable energy of all kinds.
And, according to the Energy Information Administration, this may not improve much. By 2050, at the current pace of adoption, renewables of all types will still only account for less than 15% of U.S. energy supplies.
Renewable energy bulls will point out the words “at the current pace of adoption” to suggest that initiatives such as the nascent Green New Deal will increase our commitment to renewable energy. However, that would come at a tremendous expense.
Green Energy Still Holds an Additional Premium
Hydrogen fuel cell technology is past the proof of concept stage. However, it’s now in that realm of finding customers who are willing to pay the cost. And that requires finding not just one, but several customers that are willing to pay the initial premium for using alternative energy.
I tend to look at renewable energy solutions in the same way I view a house upgrade. If you’re sitting with your builder and discussing options and upgrades to your custom home, price is always a consideration. So you’ll ask yourself if you really need to have speakers in your shower, or the heated driveway, or whatever it is that might be a nice luxury.
I believe a similar calculation goes on when looking at FuelCell technology. Families have many priorities and so do companies that also have shareholders to consider. And it’s always easier to pay a premium on something like green energy until it’s your money.
The truest of true believers would love to mandate clean energy. But since they can’t yet, they offer tax incentives and pull other levers to try to get to critical mass. All of this points to the fundamental problem that faces FuelCell and all hydrogen stocks. They will always be in financial trouble until they can generate income without selling shares.
And FuelCell has a unique problem in that the company operates in perhaps the most expensive niche being occupied by hydrogen fuel cell providers. For example, Plug Power (NASDAQ:PLUG) provides hydrogen fuel cells for vehicles such as forklifts. It’s a small niche, but it’s easily identifiable, and the company has two significant clients in Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) that the company can leverage, and also draw revenue from.
Is FCEL Stock Worth Your Trouble?
Hydrogen fuel cells are drawing renewed attention due to the efforts of companies like Nikola (NASDAQ:NKLA). But the technology is still not ready for prime time on a wide scale. That being said, FCEL stock is a long-term investment. But if you’re looking for a pure play, there are better options.
With that in mind, a good way to invest in FuelCell stock is through an exchanged traded fund such as the Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW). This will allow you to get diversified exposure to the entire sector. And that can make investing in hydrogen fuel cells less scary through the rest of 2020.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019.