XLI - Fluence Energy: Negative Earnings This Year As Shares Probe Support

Summary

• A recent mixed quarter along with bearish technical developments lead me to downgrade shares of Fluence.
• The stock neared a prior profit-taking level, but the bulls could not keep the upward trend going.
• With a near-fair-value price-to-sales ratio and negative EPS, a hold is warranted for now.

The Industrials sector was very strong last year amid rising rates and hopes for a soft landing in the economy. This year, in the face of rising yields, growth names have done relatively well, and value spots have lagged. I see it as more of a pause in a broader trend that supports the value case. Hence, 2023's underperformance with XLI may be short-lived as investors come to grips with higher discount rates applied to DCF models on tech names.

One hot stock during the back half of 2022 has stalled, retreating by nearly a third to key support on the chart. Let's get a refreshed look at Fluence Energy (FLNC).

Industrials Retreat, But A Modest Recent Relative Uptick

According to Bank of America Global Research, Fluence Energy, Inc was launched in January 2018 by Siemens and AES as a joint venture dedicated to innovating modern electric infrastructure. Fluence delivers energy storage products, services, and digital application packages, as well as artificial intelligence-enabled IQ platforms to optimize renewable and third-party storage assets.

The Virginia-based $3.4 billion market cap Electrical Equipment industry company within the Industrials sector has negative trailing 12-month GAAP earnings and does not pay a dividend, according to The Wall Street Journal. The stock has an elevated short interest at 12.7% per Seeking Alpha.

Earlier this month, JP Morgan downgraded the stock following its February 9 earnings that were mixed. Fluence reported an earnings beat (a loss less than expected) while revenues, up 78% YoY, were below expectations. The upside was that management issued upward guidance, but the stock sunk big in the days after the report.

On valuation , analysts at BofA recently took down estimates for FLNC earnings in 2024. EPS is now seen as remaining further in the red through next year before eventually turning positive by 2025. The Bloomberg consensus outlook is slightly more sanguine, forecasting operating profits next year.

With no yield and negative free cash flow, there might not be much to like on the surface here. But I notice that shares trade at a 1.33 forward price-to-sales ratio following updated top-line figures and the recent stock price decline. That's about in line with the sector median. Overall, the valuation continues to look just fair to me.

Fluence: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon shows an upcoming shareholder meeting on March 20. There's a chance volatility could rise around that date, but the calendar is light after that until the unconfirmed Q2 2023 earnings date.

Corporate Event Risk Calendar

The Technical Take

There have been some interesting developments on the charts with FLNC lately. Notice in the graph below that shares have retreated to an uptrend support line, but there's also been bearish divergence as shares rose to new highs in January and early February. Back in December, I was bullish on the stock due to some favorable technical moves, but the momentum did not materialize (though shares got very close to my $28 target).

Now, I see risks that shares could break this support line. What's troubling is that the next area of buyers may not hit until Fluence dips to near $12. I'm a hold here, and short-term traders might want to consider a stop under the rising 200-day moving average.

FLNC: Bearish Divergence, Stock At Trendline Support

The Bottom Line

I am downgrading FLNC to a hold here after the breakout did not hold up well. Still, the stock is near key support, and investors should watch the levels outlined in the technical view. Fundamentally, Fluence appears near fair value.

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