2023-06-07 11:00:00 ET
Summary
- FuelCell Energy short-sellers were stunned in early May due to project updates from its Exxon Mobil partnership.
- However, buyers have failed to regain control decisively. With FuelCell Energy slated to report earnings on June 8, investors must prepare for more pain if it disappoints.
- FuelCell Energy remains deeply unprofitable. With growth investors turning to the AI hype now, they might not be interested in green hydrogen players like FCEL.
- With interest rates unlikely to return to the previous low rates era anytime soon, FuelCell Energy could find it more expensive to scale and reach profitability.
- FCEL's long-term trend has also reversed to a downtrend, suggesting momentum investors are unlikely to support it.
FuelCell Energy, Inc. ( FCEL ) is slated to deliver its second-quarter earnings release on June 8. The unprofitable fuel cell systems maker saw its stock reverse a steep three-month downward spiral in early May as the company posted updates on its carbon capture partnership with Exxon Mobil ( XOM ).
I assessed that short-sellers who loaded more bets at its late April or early May lows likely covered some bets as a precaution, as FCEL was deeply oversold at those levels. However, FCEL's short interest as a percentage of float remains relatively high at 16.4%.
As such, bearish investors are likely still holding on. With FCEL down more than 90% from its February 2021 highs, there's a significant buffer for early short-sellers.
Dip buyers who braved FCEL's downtrend bias to add more positions over time must question whether the company can convince investors about its business model. While the updates on its partnership with Exxon Mobil were positive, investors should note that earnings accretion attributed to potential commercialization will likely remain highly uncertain.
Therefore, investors buying into FuelCell Energy's thesis must have high conviction in the company's ability to leverage its commercialization execution.
Several articles were published recently about the broad potential of green hydrogen. Bloomberg reported in late April that " planned hydrogen electrolyzer projects globally have increased by 18% in the last six months. " The International Energy Agency or IEA indicated that "total hydrogen production needs to double" by 2030 to achieve "net-zero carbon emissions by 2050."
Toyota ( TM ) CEO Akio Toyoda also maintained his confidence about exploring opportunities in hydrogen projects " alongside electric vehicles to achieve carbon neutrality." Japanese automakers see higher "potential in hydrogen fuel cells for heavy-duty trucks," given the "weight and limited range" of the current battery technologies.
However, FuelCell Energy investors must understand that the level of competition is highly competitive. As the company has yet to prove its ability to scale, it's still expected to report adjusted operating losses in the forecast period through FY25 and possibly beyond.
The company received a needed booster in late May with $87M in project financing , structured as a long-term loan, payable over seven years. Bulls could argue that the financing package demonstrates confidence in the company's commercialization potential. The lead arranger of the deal, Investec Bank, is confident that the "financing strategy will support FuelCell Energy's growth."
However, I assessed that FCEL's "diamond hands" could face a period of reckoning if buyers don't return soon enough to help defend against short-sellers loading at every possible opportunity.
As seen above, FCEL is close to re-testing its November 2020 support zones. Short-sellers likely saw the opportunity to take that level but were rejected in early May by the positive sentiments surrounding the Exxon partnership.
Could the current levels attract enough "diamond hands" to return and try to bolster FCEL from falling further? I gleaned that Seeking Alpha Quant rated FCEL's valuation with a "C+" grade, suggesting it's no longer aggressive.
However, the long road to profitability could deter investors from returning in full force as growth investors rotated toward the AI hype. Seeking Alpha Quant's "D-" profitability grade indicates its earnings visibility is severely lacking.
BlackRock ( BLK ) reminded investors recently not to expect a quick return in the low-interest rates era. For nascent and unprofitable players like FCEL, the road ahead looks incredibly menacing, despite the early promise shown in its technology.
I assessed that FCEL looks likely to mean-revert in the near term after suffering a sharp three-month selloff from its February highs. However, given its unprofitability, I don't see a sustainable opportunity for investors to buy dips. Also, FCEL's price action has reversed decisively into a long-term downtrend, which could discourage momentum investors from supporting the stock.
With my Sell thesis playing out accordingly, I move to the sidelines from here.
Rating: Hold (Revised from Sell).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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FuelCell Energy: Prepare For More Losses And More Pain