Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Here's what you need to know.
What is Bloom Energy?
In case you're not familiar with the company, a short introduction may be in order. Technically a fuel cell stock, Bloom Energy isn't interested in turning cars into zero-emission vehicles. Instead, Bloom's business lies in providing green power to companies that install its Bloom Energy Server.
These stationary fuel cells pipe natural gas and biogas through a solid oxide fuel cell to create electricity without combustion. At energy conversion rates ranging from 45% to 65%, Bloom's are the most efficient fuel cells on the market -- which is probably one reason why Bloom Energy did more business last year ($376 million worth) than the next three biggest fuel cell companies combined. With companies as varied as Apple, Costco, and FedEx already using its products, Bloom has already won over a sizable portion of America's most innovative companies to its technology.
What does Wall Street think about Bloom Energy?
Bloom Energy had been on some investor wish lists for nearly a decade, but it wasn't until two years ago that investors finally got their wish, when Bloom Energy filed to hold an initial public offering -- then it took nearly two more years for the IPO to actually happen.
No fewer than 10 separate investment banks underwrote Bloom's July IPO, but they weren't allowed to talk about the stock publicly until the post-IPO quiet period expired. That finally happened last week, when most of the company's underwriters announced their first stock ratings on Bloom Energy.
Out of eight analysts who published reports on Bloom (that we know of), TheFly.com reports that only three -- JPMorgan, Morgan Stanley, and KeyBanc -- actually recommended the stock. One of Bloom's biggest backers, Merrill Lynch, came out against the stock last week with an underperform rating and a $19 price target.
Four others -- Oppenheimer, R.W. Baird, Cowen & Co., and Credit Suisse -- all rated Bloom Energy stock only neutral.
And now Credit Suisse isn't doing even that.
The rose is off the bloom
In making what was in effect a sell recommendation, Merrill Lynch warned last week that "expectations" were "high" for Bloom, yet there could be no assurance the company will succeed in cutting its operating costs by a targeted 15%. Worse, Merrill warned that in order for Bloom to grow its business 30% a year, as it hopes to do, the company will have to cut its prices significantly -- which, absent significant cost cuts, will hurt margins and could prevent the company from earning a profit.
Now, Credit Suisse has joined Merrill Lynch in the seller's camp -- and it may not be the last banker to do so.
Sounding a familiar refrain, Credit Suisse acknowledged Bloom's potential to disrupt the energy industry with its high-efficiency fuel cell technology, yet expressed concerns about the company's ability to cut costs while continuing to improve its products' quality even further. On top of that, Credit Suisse thinks Bloom stock is only worth about $24 per share -- and therefore overpriced at today's share price of nearly $30.
What comes next?
Incidentally, $30 is also the target price that one of the few investment banks (Morgan Stanley) recommending Bloom set last week. It's 10% beyond the target price that another of Bloom's fans (KeyBanc) had established. And as Credit Suisse points out, there's been "little incremental fundamental news" coming out of Bloom over the past week that might "justify the strength" in Bloom's stock price. Given this, it seems reasonable to expect that additional downgrades -- to sell, or at least to neutral -- might be expected from Morgan Stanley and/or KeyBanc in the near future, neither of which would be good news for Bloom stock.
Meanwhile, Bloom Energy remains unprofitable on a trailing-12-month basis, and shares sell for nearly 600 times forward earnings -- the profit that Bloom hopes to earn, but is as of yet still incapable of earning.
Exciting as it's been to watch Bloom double and more since its IPO, I can't help but think that its share price now looks at serious risk of withering on the vine.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool recommends COST and FDX. The Motley Fool has a disclosure policy.