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Why Plug Power Is a Better Hydrogen Play Than FuelCell

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Faizan Farooque
·4 min read
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President Joe Biden has inked a series of executive orders designed to address climate change, including a new ban on some energy drilling. During his campaign, the former vice president emphasized several climate change initiatives, including decreasing greenhouse gas emissions, in part by setting higher efficiency standards for cars, buildings and consumer appliances. It’s expected Biden will make a $2 trillion accelerated investment, with a plan to deploy those resources over his first term, some of which will go toward innovation and driving dramatic cost reductions in critical clean energy technologies, including renewable hydrogen. For these reasons and more, FuelCell Energy (NASDAQ:FCEL) stock is up 966% in the last three months.

a picture of a fuel cell
a picture of a fuel cell

Source: Kaca Skokanova/Shutterstock

Shares in U.S. fuel-cell specialist Plug Power (NASDAQ:PLUG) are also up 300%, while U.S. rival Bloom Energy (NYSE:BE) and Canada’s Ballard Power Systems (NASDAQ:BLDP) are up fourfold or more. Hence, hydrogen stocks are enjoying a bull run like never before.

However, not every company is an excellent prospect in this industry. When we hone in on FCEL in particular, we see a company in trouble. Out of the last 12 quarters, FuelCell has disappointed analyst expectations 10 times. Despite this performance, FCEL stock trades at 71.6 price-to-sales (P/S), confounding critics and bears alike. Regardless, the penny will drop at some stage.

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Explosive Growth Without Fundamental Strength

FCEL stock has outperformed the S&P 500 by 1188.6% and its sector by 1196.4% in the past year. However, if the latest earnings are anything to go by, FCEL looks like a company that will burn investors. The company reported a 54% rise in revenue to $17 million in the fourth quarter, missing consensus estimates by $50,000. Additionally, it reported a net loss of eight cents per share, which was four cents per share worse than consensus estimates.

Despite the negative results, the stock did not get that much of a hammering; people are still bullish after President Biden moved to rejoin the Paris Climate Agreement and signed a series of executive orders.

“Based on the initial policy objectives outlined by the incoming White House administration, we expect clean energy and climate policies in the U.S. to begin to match the pace of advancement seen in other markets such as Europe and Asia, and to be favorable toward development of the growing hydrogen economy,” FuelCell Energy CEO Jason Few said in a statement.

Chart shows the operating expenses breakdown of FuelCell (NASDAQ:FCEL) versus Plug Power (NASDAQ:PLUG)
Chart shows the operating expenses breakdown of FuelCell (NASDAQ:FCEL) versus Plug Power (NASDAQ:PLUG)

Source: Chart by Faizan Farooque, data from filings

Meanwhile, many wonder whether it’s better to invest in Plug Power stock, the other big player in the space, instead. First, there is valuation. PLUG stock trades at 65 times P/S versus FCEL stock at 71.6 times. Then you have the operating metrics. The gross margin for PLUG is 5.9%, while FCEL is languishing at -10.9%.

When you look at the breakdown of operating expenses, you will see that, compared to Plug Power, FuelCell spends more on selling, general and administrative expense (SG&A) than it does on research and development (R&D). That’s never good, especially when you consider the kind of industry it’s in.

Finally, let’s talk a bit about sales growth. The outlook for both companies is good, but PLUG is edging FCEL every year in analyst estimates.

Chart shows the year-over-year growth rate of FCEL versus PLUG
Chart shows the year-over-year growth rate of FCEL versus PLUG

Source: Chart by Faizan Farooque, data from S&P Global Market Intelligence

FCEL Stock Has to Do More

Last month, J.P. Morgan analyst Paul Coster turned bearish on the alternative energy company. He argued that the stock is worth about half of its latest closing price. Coster cut his rating to underweight from neutral, assigning a $10 price target and claiming the stock is “richly valued” at current levels.

The same analyst initiated coverage of PLUG stock with a hold rating. “Hydrogen pure-play stocks have outperformed the S&P 500 massively,” he wrote. He conceded that PLUG stock is the “best in class.” But he advised investors to wait for a better entry point in the stock before buying it.

Out of 14 analysts covering PLUG, 11 have given a bullish verdict on the stock. Meanwhile, FCEL stock has one analyst out of seven giving a bullish verdict. The 12-month price target of $13.60 per share implies a roughly 43% downside.

In conclusion, there isn’t anything that warrants FCEL’s premium valuation over other fuel cell stocks. Until there is something — anything — from the company that backs its valuation, I don’t believe it’s worth your time. If you must invest in the hydrogen space, PLUG seems the better option, at least on fundamentals.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.

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