When it comes to investing in fuel cell companies, there are the usual suspects: Plug Power (PLUG -5.17%), FuelCell Energy (FCEL -5.01%), and Ballard Power Systems (BLDP -2.23%). Investors, however, now have a new option. Bloom Energy (BE -1.23%) is tapping the equity market to help it fund its growth initiatives. Offering 18 million shares, Bloom raised $270 million with its IPO.
With roots extending back to 2001, Bloom Energy has deployed its power solutions at approximately 500 locations globally -- locations that represent a wide swath of industries. From retailers to government organizations like NASA, a variety of customers have recognized that fuel-cell solutions provide a viable alternative to traditional energy sources.
Image source: Getty Images.
A peek at a premier power player
Primarily, Bloom provides its Bloom Energy Server, a stationary power generation platform, to the commercial and industrial markets. Converting natural gas (or biogas) into electricity through a solid oxide fuel cell, the modular solution can be customized to meet each customer's individual power needs, and provides a clean-energy alternative to traditional backup systems like diesel generators and batteries. According to the company's S-1, the Bloom Energy Servers convert fuel to electricity at an efficiency rate of 45% to 65% -- the highest efficiency rate of any commercially available power solution -- representing a competitive advantage.
Besides serving customers dealing in cloud services and data centers like Apple and Equinix, Bloom has provided fuel-cell solutions to retail giants like Costco, telecommunications leaders like AT&T, and logistics providers like FedEx. But it's a utility, Southern Company, that has provided Bloom with the lion's share of revenue lately. In 2017, for example, Southern Company accounted for 43% of Bloom's total revenue, while the utility's importance grew even further in Q1 2018, representing 53% of total revenue.
By far, Bloom's the big dog
In order to gain better insight into the relatively small fuel-cell landscape, let's start by taking a look at some key metrics for Bloom Energy and its competitors.
| Company | 2017 Revenue | 2017 Gross Margin | 2017 Operating Margin | 2017 Net income | 2017 Operating Cash Flow |
|---|---|---|---|---|---|
| Bloom Energy | $376 million | (4.8%) | (41.8%) | ($281 million) | ($67 million) |
| Ballard Power Systems | $121 million | 34.3% | (3.3%) | ($8 million ) | ($10 million) |
| FuelCell Energy | $96 million | 2.9% | (45.6%) | ($54 million) | ($72 million) |
| Plug Power | $103 million | (27.2%) | (98.6%) | ($127 million) | ($60 million) |
Data sources: Bloom Energy S-1, author's calculations, and Morningstar.
Clearly, Bloom has been the most successful among its peers in selling customers on the merits of incorporating fuel-cell solutions. But its leadership position is even greater than the top line may suggest. Although Ballard and Plug Power maintain some presence in the stationary power market, it's not their bread and butter. Ballard, for example, reported that backup power accounted for 1.6% of revenue in 2017, and Plug Power, which doesn't break out stationary power sales figures in its earnings reports, said in its Q1 2018 letter to shareholders that the company's "priority remains on building a profitable material handling business." Consequently, FuelCell Energy appears to be Bloom's greatest competitor.
Image source: Getty Images.
In actuality, FuelCell Energy's competition doesn't seem to be that formidable. Granted, the financial information provided in Bloom's S-1 is rather scant; we only see the financials for 2016 and 2017. Nonetheless, it's enough to recognize that the $376 million in sales that Bloom reported in 2017 represents an 80% increase over the $209 million it reported in 2016. FuelCell Energy, on the other hand, has seen its top line shrink in each consecutive year going back to 2013, when it reported revenue of $188 million.
Focusing on the bottom of the income and cash flow statements, however, provides some cause for concern. While Bloom has distinguished itself for its ability to generate revenue, it shares with its fuel-cell brethren the dubious distinction of being unprofitable and maintaining negative operating cash flow.
A balance sheet in full bloom... with debt
Unable to generate profits, Bloom has heavily relied on issuing debt to finance its operations. From the end of 2016 to the end of Q1 2018, Bloom's net debt has ballooned from $637 million to $862 million. Weighing down the balance sheet further are the company's contractual obligations and other commitments, totaling $1.34 billion. And the fact that $804 million of the $1.34 billion is due in the next three years yields an even greater sense of foreboding.
Assuming a conservative perspective, we can expect the company to continue reporting net losses in the near future. When taking this into account, plus the fact that the company only raised $270 million with the IPO, it's reasonable to expect the company to weigh down its balance sheet even further in the next few years. Of course, management may elect to take a different route to keep the lights on, choosing to raise capital by issuing more stock. Unfortunately for those who have added Bloom to their portfolio, this would provide little solace, subjecting them to dilution.
What's an investor focused on fuel cells to do?
It's understandable that investors would be energized about a new fuel cell company hitting the market, considering the limited options available to them. But it's important to exercise caution with this industry leader. Besides the fact that Bloom, like its peers, has been unable to prove that dealing in fuel cells could be a lucrative endeavor, the company's considerable amount of debt is of great concern. Additionally, the company's reliance on one customer, Southern Company, to provide more than 50% of revenue in Q1 2018 should have investors reaching for -- though not necessarily raising -- a red flag, since a downturn in that relationship could be devastating to the company.
All things considered, at this point, jumping aboard and picking up shares of Bloom should only remain a consideration for the most risk-tolerant of investors.
