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Gevo Is a Fascinating Company, But Not a Buy

·4 min read
  • Gevo (GEVO) stock has $3 billion in signed financeable offtakes, but depending on some variables the actual revenue could be lower.

  • Gevo’s NET-ZERO 1 project is expected to add $150 million-$200 million per year in EBITDA, but not until 2025.

  • Its current financials don’t inspire confidence, meaning GEVO stock isn’t a buy right now.

Gevo (NASDAQ:GEVO) is renewable fuels company which has what I consider a huge problem now. While it is an interesting company with a lot of exciting business prospects, its just not a buy right now. How can this be possible?

Ecology, alternative sustainable energy and environment protection saving business concept
Ecology, alternative sustainable energy and environment protection saving business concept

Source: Oleksiy Mark / Shutterstock.com

There are three aspects to consider now about GEVO stock: the business opportunity with its carbon-neutral fuel, the cost of an opportunity to wait for its plans to come to fruition, and lackluster financials.

GEVO

Gevo

$4.68

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Gevo’s Business Opportunity

In my previous article about Gevo, I said it has many interesting deals but those deals aren’t paying off yet. I saw that as a major hurdle to overcome.

This renewable resources company has been given a huge potential business opportunity by the U.S. government, with the $1.2 trillion infrastructure bill and a clean energy bill under consideration worth $550 billion. Gevo has several strategic partnerships to use its energy-dense liquid hydrocarbons and “renewable chemicals with net-zero greenhouse-gas emissions” to become a leader in clean energy.

In its corporate presentation in March 2022 , the firm stated it has approximately $3 billion worth of signed financeable offtakes, as well as being in talks for more financeable offtakes worth more than $30 billion.

These numbers are huge for a company like Gevo that has a market capitalization of less than $1 billion. It gets more impressive given the fact that Gevo generated sales of $711,000 in 2021. Making billions of revenues when between 2017 and 2021, the highest figure of sales was $32.86 million, is a huge catalyst.

How certain is this catalyst? Gevo states that these revenue estimates are based on certain assumptions in its contracts. Some important factors are the price of fuel and how much environmental credits are worth.

Now, for the $30 billion revenue estimate, there is no guarantee that these contracts will be executed. This means a lot of uncertainty.

And even for the $3 billion in agreements, there’s also uncertainty as the focus is on assumptions. If its assumptions are off, that number could be higher — or lower. In business, uncertainty is not your friend.

This drives us to the second factor.

Gevo Stock Has a High Opportunity Cost

Gevo stated in that same presentation that its NET-ZERO 1 project is expected to go into operation in 2025 in Lake Preston. This project is expected to generate an EBITDA in the $150 million-$200 million per year range.

We are still in early 2022 though, so waiting for at least three more years to generate revenue from this project carries a very high opportunity cost.

The EBITDA generation is also based on current assumptions. In three years, a lot of these assumptions may change for the worse. Why invest now in GEVO stock and wait for three more years to witness the actual outcome of the NET-ZERO 1 project? There are better ways to invest your money right now.

2021 Financials Look Pessimistic

Have fourth-quarter 2021 financial results given investors a reason to smile then?

The revenue of $100,000 for Q4 2021 was much lower than the $500,000 in Q4 2020. Loss from operations of -$16.5 million for the quarter widened compared to -$7.6 million in Q4 2020.

Net loss per share of -8 cents for the quarter was narrower compared to -15 cents in Q4 2020. However, this was partly due to a dilution effect, as in Q4 2020 there were around 120 million weighted-average common shares outstanding versus 202 million in Q4 2021.

Bottom Line on GEVO Stock

Shares of Gevo remain risky and volatile as the key issues such as anemic revenue and net losses remain.

The company presents a very high opportunity cost dilemma now based on the assumptions of future revenue generation. The magnitude of this cost and the uncertainty weigh in now to suggest investors should avoid the stock until those assumptions become facts.

On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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