FuelCell Energy (NASDAQ:FCEL) is really quite a puzzle. FCEL stock gained nearly fourfold from $2.00 at the end of October to $10.20 on Nov. 30. But nothing has happened that deserves that kind of spike.
FCEL in the first half of November was tracking along with Invesco WilderHill Clean Energy ETF (NYSEArca:PBW), which has the stock at 5.49% weighting, the largest of its 47 portfolio holdings. Then, around mid month, FuelCell stock broke away, ending the month up 374% while the exchange-traded fund gained an otherwise respectable 33.5%.
However, the only event of any importance lately is that the company raised $105 million on Oct. 2, for 50 million shares, or 20.9% of its total before then. JP Morgan Securities was the lead underwriter.
Rampant Speculation Boosts FCEL Stock
So, it might not come as any surprise that six days later JPMorgan came out with a major “buy” report. The bankers said the FCEL stock represents a “massive” opportunity in clean, sustainable energy.
So much for Chinese walls between investment banking and research on Wall Street.
Both of these events do not warrant a near-4x jump in the FCEL stock price, coming weeks later. The truth is what is really going on here is rampant speculation and gambling in a hot sector.
The most-likely cause is the promise of a Biden administration coming in and igniting efforts to make hydrogen-fueled cars and vehicles more acceptable. They could theoretically do this by ramping up tax and other incentives. But again, I highly doubt that warrants a fourfold jump in the FCEL stock price.
Profits, Cash Flow Elude
There is also one more inconvenient fact. The company has never been nor expects to be profitable. Here is how management put on page 60 of its latest 10-Q SEC filing for the quarter ending July 31:
“…We have not been profitable since our year ended October 31, 1997. We expect to continue to incur net losses and generate negative cash flows until we can produce sufficient revenues and margins to cover our costs. We may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.”
In fact, if FuelCell Energy had not raised the $105 million in cash, they would have run out of money. At the end of Q3, the company reported its cash flow from operations was negative $24.6 million.
Net cash used in investing activities was negative $24.3 million. In other words, in nine months through July 31, FuelCell burnt through $48.9 million, and had just $72 million left.
At least now, with the additional $105 million, it can keep on spending as if it is an R&D company in the past with no mind to profits.
One wonders, however, how long this most recent capital raise will last. Management simply doesn’t seem to have a business plan that includes profits. I couldn’t find one.
For example, FuelCell Energy released a presentation on Sept. 10, after its Q3 earnings. There was no discussion of profitability or future profits.
In fact, the closest it came to this was a vague statement on page 12 that one of its goals was to “deliver positive adj. EBITDA” (earnings before interest, taxes, depreciation, and amortization). But that is until at least FY 2022, by September 2022.
What To Do With FCEL Stock
Never buy a stock after it has spiked over 4 times. The likelihood of being able to get into FCEL stock much cheaper is very high. There is essentially no bargain element here.
According to the JP Morgan analyst Paul Coster, FuelCell Energy is going to “pivot into profitability” by converting project backlog into recurring revenues. He wrote that this will “drive strong long-term growth after years of investment and cash-burn.”
Even if all that were true and going to happen as the analyst forecast, the 4x spike in its market capitalization already reflects this happy success.
Moreover, the company is not even projecting for anything like this to occur on a sliding scale until two years in the future. And they have provided no numbers to back this up.
Presumably, JP Morgan got some sort of inside look at the company’s internal forecasts as a part of selling more shares to the public. But of course, their motives are highly suspect. The investment banking division needed justification to sell the shares. So they wrote that somehow the company was going to turn years of losses into gold.
I’m sorry, I am not buying it yet. I need more. I need to see evidence that the company can run a profitable company. And I need to see a bargain element in the stock before buying. FCEL stock does not have either one.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.