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Gevo (NASDAQ:GEVO) entered 2021 trading a little over $4. By February, GEVO stock had rocketed beyond $14. Further, it’s changed hands below $6 on four occasions over the calendar year and now it’s back to being a penny stock.
Source: Vitalii Vodolazskyi / Shutterstock.com
To say it’s had a strange year in the markets is an understatement.
Gevo converts renewable energy into energy-dense liquid hydrocarbons for gasoline, jet fuel, and diesel fuel, among others. Its products are intended to yield at-or-near zero greenhouse gas emissions, a far superior outcome to traditional fossil fuels.
It’s a big reason why I recommended it as a speculative buy on June 15:
While much has to go right for Gevo in 2021 and 2022 for its share price to move into the teens or higher, there’s no question that it’s got a role to play in the greening of America and the world. If you like the company as I do, I suggest that you buy some of its shares now and see what happens.
It hasn’t performed as expected, losing 39% of its value since that article. So I’m glad I provided the caveat that it wasn’t suitable for your retirement account.
As it enters 2022, it has a lot to prove to investors and me. As a result, I won’t be nearly as aggressive this time around with a GEVO stock recommendation. It’s going to take a lot more evidence to convince me to get back on the bandwagon.
Is GEVO Stock Undervalued?
That depends on how you view the company’s circumstances. Relative to its 52-week high of $15.57, trading below $5 is undoubtedly a significant haircut. Alternatively, if you’re honest about its business, it’s operating at the pre-revenue level. That makes it a clean energy startup, not a $1 billion market cap.
Some of my more pessimistic colleagues make good points about why backing this horse is a mistake.
Larry Ramer argues that a combination of lackluster customer orders and a nosebleed valuation of 300x 2022 revenue estimates suggests that investors should wait until revenues are seen to be accelerating.
Ian Bezek points out that the company has destroyed 99.9% of its shareholder value over the past decade by failing to deliver something as basic as a gross profit. It hasn’t had a gross profit, according to Bezek, since 2011.
And, if that’s not enough, Stavros Georgiadis recently discussed a cornucopia of items that are hobbling the company and its share price.
It’s easy to be pessimistic when a company gives you the ammunition to bury it.
The Bright Side
On Dec. 7, Gevo announced a supply agreement with Kolmar Americas that sees the company provide 45 million gallons of renewable energy-dense liquid hydrocarbons over eight years, the largest supply agreement in its history and estimated to be worth $2.8 billion in revenue.
That’s some agreement if it pans out. I say if because supply agreements are easily broken. That said, it’s a sign the company’s products are gaining traction.
Kolmar isn’t some tiny business. Based in Switzerland, the privately held company is a leader in manufacturing and marketing renewable fuels. It has manufacturing facilities in Connecticut and Texas. While its financials aren’t readily available, I have found an annual revenue estimate of $1.55 billion. That’s about 40% of the sales of Cosan (NYSE:CSAN), one of the biggest players in biofuels.
InvestorPlace’s Louis Navellier wrote enthusiastically about Gevo in November:
As the U.S. and other major economies move towards reducing emissions, trends are on its side. Put this all together, and Gevo stands to quickly zoom out of the pre-revenue stage and start producing substantial amounts of revenue. Once this payoff moment approaches, expect its stock price to lift off, as well.
The next four quarters are critical for Gevo and its shareholders. As Navellier pointed out, investors are frustrated with its lack of follow-through on all these supply agreements announced in 2021.
The time has come for GEVO stock to stand and deliver in 2022.
If you’re a speculative investor, buying under $5 gives you a legitimate shot at making a double in 2022. However, if you’re looking for a slam dunk, Gevo’s history suggests this isn’t it.
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On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.