A global thrust toward renewable sources of energy, falling costs of generation, and high investor enthusiasm sent renewable energy stocks soaring in 2020. With a 277% year-to-date rise as of this writing, fuel cell stock Bloom Energy (BE 3.64%) was no different. But is Bloom Energy more promising than other fuel cell manufacturers? Let's find out.
Fuel flexible cells
Bloom Energy offers fuel cells primarily in the U.S., and also in Japan, India, and South Korea. The company's fuel cell technology differs from what most other fuel cell companies typically offer. Proton exchange membrane (PEM) fuel cells are currently the most widely used fuel cells. These are compact and can start or stop quickly, and so are useful in vehicles such as forklifts. PEM fuel cells use hydrogen as an input. Hydrogen fuel cells' only byproduct is water, making it one of the cleanest sources of energy.
In contrast, Bloom Energy uses solid oxide fuel cell technology, which converts input fuel into electricity through an electrochemical process without burning the fuel. The input fuel is usually natural gas or biogas. Bloom Energy's value proposition is increased reliability compared to electric power grids, but with reduced emissions, as the fuel is not burned. The company's fuel cells can also use renewable energy sources, such as solar or wind, as input and electrolyze it to produce hydrogen, which can later be used to produce electricity. So, its fuel cells are fuel flexible, compared to hydrogen fuel cells.
Old company, evolving technology
While the current offering is already cleaner than traditional energy generation, Bloom Energy continues to develop it to bring it to zero-carbon level. It is working on several ways to achieve this. One is by capturing CO2 emissions from its fuel cells, which can then be stored underground or utilized in some other way. The second is by increasing the use of renewable natural gas as an input fuel. Finally, it is working to expand the use of hydrogen as an input fuel as mentioned above.
All of this sounds great for the environment, but a key concern is that Bloom Energy is still developing technologies while its current offerings continue to remain unprofitable. It would be challenging for the company to achieve profits on technology it is still developing when it hasn't been profitable for years from what it has been offering. The company deployed its first fuel cell server in 2009.
Bloom Energy targets a gross margin of 30% and operating margin of 15%, excluding stock-based compensation, by 2025. Notably, including the impact of stock-based compensation and interest charges, net profits would be minimal. And we are talking about five years down the line. Still, if the company attains profitability, it could be a big turning point for it. Growing business by selling a profitable product is easier than one that is generating losses. The company's addressable market could be huge, if the use of fuel cells technology grows as it is hoping.
Hydrogen fuel cells -- Bloom Energy's key future offering -- may encounter limited adoption due to several practical limitations. Moreover, falling costs and improvements in lithium-ion batteries may make hydrogen fuel cells largely redundant. Another risk specific to Bloom Energy is its concentrated customer base. For the year 2019, two customers accounted for 57% of the company's revenue. Not only do these exercise significant bargaining power, Bloom's revenues would be materially affected if either backs out. Finally, Bloom Energy faces stiff competition from other fuel cell providers, especially in the transport segment, where PEM fuel cells could be the preferred choice.
With falling product costs and improved efficiency, Bloom Energy may attain profitability, which has been elusive so far. However, considering the numerous risks that the company faces, I would watch this stock from the sidelines for now.