Summary
- FuelCell is scheduled to report its FQ3 earnings on September 8. Despite its disappointing release in Q2, FCEL managed to sustain its June bottom, corroborating our previous thesis.
- However, FCEL has pulled back nearly 30% from its August highs as the market digested the gains from its post-Inflation Reduction Act momentum spike.
- Given FuelCell's deep unprofitability, we surmise it's challenging for investors to buy into the hype unless management revises its medium-term outlook significantly.
- While we are confident that its May lows should hold resiliently, the current price action is not constructive. Coupled with a well-balanced valuation, some caution is appropriate.
- We discuss why we revise our rating on FCEL from Speculative Buy to Hold as it heads toward its FQ3 release.
Thesis
We updated investors in our June article on FuelCell Energy, Inc. ( FCEL ) that it has been forming a bottoming process since May. Despite posting highly disappointing results for Q2, it didn't cause FCEL to break below its May lows, as its bottom held resiliently.
Therefore the market has been accumulating FCEL quietly, even as the pessimism on many renewable energy stocks was notable in mid-2022, given their unprofitability. However, the market rewarded patient investors as FCEL leveraged the passage of the Inflation Reduction Act (IRA), which aims to spur investments in renewable energy projects while reducing costs significantly. Therefore, FuelCell is also well-primed to be a key beneficiary, as it could help accelerate the company's road to profitability, helping to lift its valuations.
Notwithstanding, the market has digested the rapid surge in FCEL toward its August highs, as sellers leveraged the post-IRA optimism to cut exposure. Still, investors who capitalized on our previous article would have seen more than 30% gains, allowing them to benefit from a reasonably profitable opportunity in just over two months.
We reminded investors that FCEL was a speculative opportunity. Therefore, we emphasized that investors need to capitalize on sharp momentum spikes (regularly seen in FCEL's price structures) to take profits accordingly and not let their gains dissipate. Hopefully, investors have executed the appropriate risk management strategies to protect their gains.
FuelCell heads into its upcoming FQ3 release on September 8 , with its stock down nearly 30% from its August highs. We surmise it's appropriate to revise our rating as we parse management's commentary on its growth cadence and benefits from the IRA moving ahead.
While we deduce that FCEL should sustain its May lows robustly, we are concerned with the lower-high price structure formed by its August highs, suggesting a secular downtrend. Coupled with what we deduce is a well-balanced valuation, we prefer to observe more constructive price action before suggesting to investors to add exposure.
Accordingly, we revise our rating on FCEL from Speculative Buy to Hold.
FuelCell's Unpredictable Margins Complicate Its Analysis
Despite the disappointing quarter in Q2, we expect FuelCell's revenue growth to recover in H2, as the company highlighted it expects to complete its product sales of 20 replacement modules to POSCO Energy by the end of 2022. As the company didn't deliver any module in Q2, it implies FuelCell expects sales of 14 replacement modules in H2, which should reaccelerate its growth rate, as it laps an FY21 without the contribution from product sales.
However, note that FuelCell's gross margins remain volatile for its profitable segment, Advanced Technologies, while Generation is still highly unprofitable. Therefore, we surmise that it complicates the analysis for investors over assessing its route to profitability.
FuelCell adjusted EBITDA margins % consensus estimates (S&P Cap IQ)
Furthermore, the consensus estimates (neutral) suggest that FuelCell should remain deeply entrenched in unprofitability through FY23, even as it remains committed to its FY25 revenue target of more than $300M. Hence, we urge investors to parse management's updates on the benefits of the IRA passage, given its recent optimism. CEO Jason Few articulated:
These policy mechanisms will provide businesses with the long-term market and tax certainty needed to make important investment decisions in hiring, manufacturing, and partnerships that will lead to a clean energy economic renaissance in the United States while enhancing grid resiliency and reliability. ( FuelCell press release )
Is FCEL A Buy, Sell, Or Hold?
Given FuelCell's unprofitability, we urge investors to parse how the market intends to value FCEL based on its price action.
As seen above, FCEL has a resilient bottoming process from May to July (pre-Q2 earnings and pre-IRA passage) before surging toward its August highs. Therefore, the price action corroborated our thesis of a quiet accumulation phase, despite the high level of pessimism then.
However, FCEL formed another lower high in August, below its previous peak in March 2022. Hence, FCEL remains embedded in a secular downtrend, despite its May-July bottom.
Furthermore, FCEL's NTM revenue multiple remains close to its 10Y mean, despite the battering from its 2021 highs. Hence, we surmise that it seems more well-balanced but not undervalued.
As such, we believe it's appropriate for investors to be more prudent in considering whether to add FCEL at the current levels as it heads into its FQ3 earnings release.
Accordingly, we revise our rating on FCEL from Speculative Buy to Hold and urge investors to wait patiently for more clarity from its price action moving ahead.
For further details see:
FuelCell: Don't Be Tempted To Buy This Pullback Yet