Beware of the Hype Around Shares of FuelCell Energy Inc

The fuel cell industry has been on fire lately as Plug Power Inc (NASDAQ: PLUG  ) won contracts to supply mobile power units to Wal-Mart for fueling forklifts. Clean energy is becoming a focus in corporate initiatives, and the shine from this acceleration in business for one clean energy vendor has helped lift shares of FuelCell Energy Inc (NASDAQ: FCEL  ) as well. Before a bearish report on Plug Power sparked a sell-off earlier this afternoon, FuelCell was soaring to three-year highs and had nearly doubled in the last five trading days in anticipation of last night's earnings. The anticipation hasn't turned into revenue yet though, and while I am hopeful that FuelCell will find its niche over the long term, there are some things to be concerned about now.

As an investor, you need to consider FuelCell on its own rather than as a comparable company to Plug Power because the opportunity may be farther out in time and the fundamentals are weaker than headlines appear. 

Revenue growth is slowing, and there are big hurdles ahead
The company reported revenue of $44.4 million and negative EPS of $0.04, slightly ahead of the Street's revenue estimate of $43.08 and in line with the expected earnings loss. At first glance, posting year-over-year revenue growth of 23% and beating the Street's revenue expectation looks pretty solid. But look beyond the headlines: Revenue growth is down from 57% in the last quarter and headed into tough comps two quarters from now. When you consider this company as an investment, you need to look at the growth trajectory and not just how the company performed relative to estimates.

Bookings is slowing as well
Usually if a company has weak revenue growth, it can get a pass if bookings are strong. Bookings is a combination of the revenue the company recognizes and the additional backlog the company has signed but not recognized. However, backlog fell for the fourth consecutive quarter, implying that bookings will remain weak even as revenue growth falters.

FuelCell's market opportunity is low-margin and very different from Plug Power's
FuelCell provides fixed power generation plants like this one for Dominion Resources in Bridgeport CT. It's a far cry from providing mobile power to forklifts and is not a proven business yet because the gross margins are so low. In the quarter, FuelCell generated $2.2 million of gross profit -- that's profit before things like research and development. This amounts to a 5% gross margin, which doesn't offer confidence that earnings will flow through to shareholders any time soon. If the company can gain scale, this problem could resolve itself, but even at $55 million in revenue, the gross margin was only 10%.

It's easy to get caught up in the hope and hype for cleaner energy sources, and when the winning company finds the right formula there will be huge rewards. However, like Google's search algorithm or Amazon's distribution model the bulk of the rewards go to the one winner.

Don't follow the crowd
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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2014, at 5:13 PM, Mulder35 wrote:

    You Bash the Stock at $3 but Herald it when it was under $2. Stating how much different and better than PLUG was because they had revenue and a backlog unlike PLUG. How two-faced are you guys? Or "short" the shares I should say. Jump on the bash wagon "now" that it has dropped, not before. Way to report Motley, be proud of yourselves and your writers!

  • Report this Comment On March 11, 2014, at 5:25 PM, TheStockDoctor wrote:

    Nice to see massive manipulation on a stock I'm only watching. The crooks of Wall Street ran it up & crushed it back down in a classic pump & dump.

    As always, the Obama enforcement officials are blind as they are too busy running up massive debt.

  • Report this Comment On March 11, 2014, at 5:29 PM, dpelleratgmail wrote:

    Mulder35 Sorry about the confusion surrounding the timing of the publishing. This article was written mid morning and timed to be published mid-afternoon. When the large stock move occurred, the line about the bearish report was added to the first paragraph. The intent wasn't to pile on a short thesis but make people aware of something that wasn't apparent in the earnings release. I'm not an employee of MF and the opinion was mine without the input of others at the company.

  • Report this Comment On March 11, 2014, at 10:42 PM, MNDLBRT wrote:

    FCEL is looking to have positive EBITDA in Q4. They also have a molten carbonate fuel cell, unique & suitable for the power plant market. They are pushing distributed power & in areas where the grid is full it is compelling. When the 700 F exhaust is used these things are efficient.

    So while the last three weeks run up has been crazy fast, longer term, FCEL has a lot of potential. The closest competition for FCEL is micro-turbines ... but still this is very different. Further out, FCEL continues to develop SOFC's which have great applicability if someone can get the economics & reliability right.

    This is early in a 20+ year game.

  • Report this Comment On March 12, 2014, at 7:18 AM, dan302 wrote:

    "As always, the Obama enforcement officials are blind as they are too busy running up massive debt."

    Trying to be as objective as I can here, this is a bizarre comment, TheStockDoctor. It costs money to run the SEC and other regulatory agencies, and it's Obama's opponents that have limited the funding. Romney for instance said that it was time to deregulate again. (And besides, both deficits and government spending have been decreasing lately, whereas they steadily increased under W.)

    I'm not taking sides here; I just prefer some nuance if we're going to make political comments. If you want to cut spending, that's fine, but it probably means cutting spending on the SEC and other regulatory agencies as well. In the past there have been some consequences for that, though some may also benefit.

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