Long-Term Investors Should Stay Away From Fuel Cell Stock

Stocks to sell

For traders, FuelCell Energy (NASDAQ:FCEL) is a stock worth watching. In the last year, FCEL stock has been significantly volatile. From a high of $5.75 in March 2019, the company’s shares crashed to 13 cents by June 2019. From an investment perspective, there are just too many uncertainties related to FuelCell’s business for its stock to be attractive.

FCEL Stock is Unattractive With Profitability Years Away

Source: Kaca Skokanova/Shutterstock

I would therefore stay away from the fuel cell technology company. Further, another fuel cell company, Plug Power (NASDAQ:PLUG), seems like a better option.

I want to start with FuelCell’s fourth-quarter results, which disappointed the markets and caused FCEL stock to plunge by 25%. The company reported revenue of $11 million in Q4 compared to $17.9 million during the same period a year earlier. Further, its Q4 EBITDA loss, excluding certain items,  was $11 million, compared to $8.8 million during the same period a year earlier.

For fiscal 2019, the company reported an EBITDA loss, excluding some items, of $31.4 million, along with negative free cash flow. My key takeaway from its Q4 results is that FuelCell Energy is a long way from generating an operating profit and free cash flows.

The company is expecting positive adjusted EBITDA in FY22. However, FuelCell has not yet said when it will generate positive free cash flow. At the same time, the company’s guidance needs to be taken with a grain of salt. In late FY19, its management suggested that its order backlog might have topped $2 billion. However, the company’s actual backlog at the end of FY19 was $1.3 billion.

Therefore, uncertainty as to when the company will become  profitable is the first reason to avoid FCEL stock.

Does FuelCell’s Order Backlog Imply Strong Top-Line Growth?

It is worth noting that FuelCell Energy has a current market capitalization of $490 million, while the company’s order backlog stands at $1.3 billion.

However, the most important point related to the backlog is that a meaningful portion of it consists of revenue that won’t be recognized for another decade or more.

Therefore, a significant portion of its backlog won’t generate revenue for many years. As a result, its high backlog does not ensure that it will generate strong top-line growth.

There Is a Glimmer of Hope

FuelCell Energy has emerged from one of its worst phases, which caused the stock to plunge to 13 cents. While the uncertainty of its profitability and growth may keep FCEL stock depressed, I think the shares have a number of potential positive catalysts.

A $200 million loan facility from Orion Energy Partners has provided a lifeline for FuelCell Energy. It has already borrowed $80 million of the funds, and the company intends to use the remaining $120 million to facilitate strategic growth and as a source of working capital. It will be interesting to see if the company can generate more orders and stop its revenue from falling further. If it can accomplish those things, FCEL stock can trend higher.

The company expects to triple its recurring revenue by FY23. If FuelCell’s recurring revenue can grow over a long period of time, its EBITDA margin and cash flows will rise. But to meet its guidance, it will have to obtain more orders. It is worth noting that in FY18, the company’s order backlog was $1.1 billion, while its backlog increased to $1.3 billion in FY19. But that level of growth won’t impress investors, especially if much of the backlog won’t be recognized as revenue for many years.

My Concluding Views on FCEL Stock

FuelCell Energy boasts that it has huge clients, including Toyota (NYSE:TM), Exxon Mobil (NYSE:XOM) and Pfizer (NYSE:PFE). However, its slow revenue growth suggests that demand for its products may not be that strong.

Overall, FCEL stock is unattractive at this point. The company needs to translate its potential addressable market into better results. Further, it won’t generate positive EBITDA and free cash flow for years.

I would keep an eye on the stock, but FuelCell is certainly not a good name for long-term investors. But for traders, there will be ample opportunities to benefit from the stock’s high volatility.

Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.

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