Investors who were left disappointed by Ballard Power Systems (BLDP +12.56%) last year didn't have to wait very long for the stock to recover. Shares of the fuel cell manufacturer lost 46% in 2018, but have gained nearly 50% in the first month of 2019. Then again, volatility isn't anything new for the small-cap stock.
While the quick start to the year is great to see, shareholders know that the stock's performance between now and the end of 2019 will be determined by how well the business executes on its goals. The stakes might be higher this year than in the past, with Wall Street watching these three indicators to gauge the long-term trajectory of Ballard Power:
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1. A next-generation product launch
Ballard Power unveiled the next generation (the eighth generation to be exact) of its technology platform last year, but it will launch commercially in 2019. The new FCgen-LCS fuel cells are expected to achieve 40% lower cost of ownership, a 33% increase in power density, and simplified systems integration versus the current generation platform, in addition to the ability to start in temperatures as low as minus 13 degrees Fahrenheit.
The fuel cell manufacturer developed the platform to specifications that would attract business in heavy-duty motive applications such as buses, commercial trucks, and even trains. That's not too surprising. In the first nine months of 2018, the heavy-duty motive segment contributed 42% of total revenue. It's also the focus of multiple partnerships in China.
Simply put, a successful launch for the new FCgen-LCS fuel cells is crucial. Investors have to keep a close eye on updates from the launch and any signs the new technology platform is gaining traction (or struggling).
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2. Partnerships in China
Struggling technology companies often find it difficult to resist the siren song of China, which offers massive growth potential on paper. In reality, giving up majority control of joint ventures (JVs) and transferring intellectual property rarely work out. Unfortunately, Ballard Power is a prime example.
The business has formed two separate collaborative efforts in China. The first, called the Guangdong Synergy-Ballard JV, has struggled to get off the ground. That sluggishness was responsible for a 65% drop in heavy-duty motive revenue in the third quarter of 2018 versus the year-ago period. Ballard Power, which owns just 10% of the venture, is supposed to earn at least $150 million in revenue from its partner between 2017 and 2021. It needs to get back on track in 2019.
The second Chinese collaboration, a JV with Weichai Power, was only finalized in November 2018. While it's too early to gauge progress, the deal appears to be a little sweeter for shareholders.
For starters, Ballard Power will own at least 39% of the JV under current terms. Then there's the fact Weichai Power and another shareholder made equity investments totaling $184 million in the fuel cell manufacturer, which will add considerable financial flexibility. And finally, Ballard Power will provide access to its next-generation technology platform to the JV in return for $90 million. That may or may not make up for the risks of doing business in China, but the business won't have a cash problem anytime soon.
Nonetheless, it desperately needs the manufacturing partnerships to hit their targets in 2019 and beyond to realize long-term success.
Check out the latest Ballard Power earnings call transcript.
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3. A clear communication of the strategy
There's a strong argument to be made that Ballard Power is overextended. It's simultaneously attempting to put its fuel cell technology into cars, trucks, buses, trains, forklifts, submarines, boats, and unmanned aircraft. No wonder the business posted an operating loss of $15.5 million through the first nine months of 2018.
When companies try to do everything, they often end up accomplishing next to nothing. It's a relatively common observation when it comes to companies wielding an interesting technology platform that has never quite found a great fit in the marketplace: Just throw it at everything and see if something sticks! Investors likely would be better served if the company clearly communicated what, exactly, it's doing and how, exactly, it will achieve sustainably profitable operations.
It might be the case that scaling down, focusing on the most promising application or two, and working to hit a home run (or at least a ground-rule double) would allow Ballard Power to reach its full potential in the long run. That would be better than a continuous string of strikeouts, which has forced management to sell large chunks of equity and open entire technology portfolios without clear benefit just to fund operations.
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A crucial year for the business
This could be a make-or-break year for Ballard Power. It went all-in on heavy-duty motive applications in China -- diluting existing shareholders by over 20% and lifting the curtain on its intellectual property in the process. While the company will be flush with cash for the foreseeable future, its success is now largely dependent on Chinese partners hitting established manufacturing targets. As the Guangdong Synergy-Ballard JV shows, that's far from guaranteed. If collaborations continue to underperform, then the company may not be able to sell more shares or license more technology to keep the lights on. That makes this fuel cell stock relatively risky.
