Stocks related to hydrogen energy have been on fire over the past year as investors have speculated that a bright future is around the corner. Bloom Energy's (NYSE:BE) stock has nearly quadrupled in the past year, Ballard Power (NASDAQ:BLDP) is up 298%, and FuelCell Energy (NASDAQ:FCEL) and Plug Power (NASDAQ:PLUG) are up 752% and 1,510%, respectively.
As great as these renewable energy stocks are performing, the companies behind them aren't quite the high-growth profit machines you might think this performance would require. In fact, they're all losing money! Here's what you should know about these stocks, and where the best bet is in 2021.
Where hydrogen companies are investing
Not all hydrogen companies are the same, and the markets they invest in can be extremely different. I'll start with the biggest companies first.
Plug Power, with its $31.5 billion market cap, is primarily a hydrogen fuel and forklift fuel cell company. A vast majority of its revenue is literally providing fuel cells and hydrogen fuel to warehouse forklifts. To expand that core, the company has recently signed agreements with Groupe Renault to develop fuel cell systems and hydrogen-related services in Europe for light commercial vehicles, and a partnership with South Korean SK Group to advance hydrogen energy (which came with a strategic investment of $1.5 billion). The challenge is that both of these deals are built around using hydrogen as a transportation fuel, and that's never been proven at scale.
Ballard Power Systems is playing in a lot of the same areas as Plug Power. It provides fuel cells to materials-handling vehicles, and has partnerships in China to develop fuel cell vehicles and in Europe to build trucking components.
FuelCell Energy primarily makes backup power plants for utilities and commercial buildings. Its products use natural gas as an input, not hydrogen, although the company says it can produce hydrogen for local transportation and industry. As far as hydrogen companies go, this is the least invested in clean hydrogen as a fuel source.
Bloom Energy is the biggest of these four companies by revenue and smallest by market cap. But it's potentially addressing the biggest possible hydrogen markets. Bloom Energy's servers are used as backup power, like Fuel Cell Energy's, but it's moving to both produce and use hydrogen from clean sources like wind and solar. In that sense, it's addressing the $2 trillion electricity market at the utility level from both the fuel and consumption sides. In also recently announced an industrial-scale electrolyzer product and a partnership with Samsung Heavy Industries to develop a hydrogen-powered shipping vessel.
You can see that these companies are going after very different markets with very different upsides. And that plays into how we should look at their valuations.
Who cares about valuation anyway?
Where this market gets a little crazy is when we look at valuations. It's not just that these stocks have risen sharply in the past year, it's that many of them will be incredibly expensive for the foreseeable future. First, let's look at the market cap, revenue, and net income of each of these companies. You can see below that Plug Power, Ballard Power Systems, and FuelCell Energy all trade for price to revenue multiples of around 100, a crazy multiple in most investors' eyes.
Let's take Plug Power as a great example of how wild valuations are. The company has said that its "2024 Vision" is to have $1.2 billion in annual revenue and $250 million in adjusted EBITDA. That's up from $307.5 million in revenue over the past year and negative $61.2 million in EBITDA. To make matters worse, management has a long, long history of underperforming its own projections and diluting shareholders with big stock sales, so even these projections may not be hit. But even if the company reaches those performance levels at the end of 2024, it will trade for 27 times sales and 132 times EBITDA. Those are projected multiples four years from now!
To look at these companies another way, a metric I like to look at when thinking about how profitable a company could be in the future is gross margin. If a company has a steady or rising gross margin as revenue grows, it can grow earnings rapidly as long as operating expenses grow more slowly than revenue. That's operating leverage in a business.
You can see below that Bloom Energy has the best margins in the group, while Plug Power and FuelCell Energy both reported negative gross margins last quarter. In fact, over the last three years Bloom Energy's gross margin has increased, while all three others have seen margins decrease. Margins can change, but right now it looks like Bloom Energy is on the best path.
Where to put your hydrogen investments
If we just look at financial performance, Plug Power and FuelCell Energy aren't worth investing in right now. Their margins are terrible, and until they improve I would stay away from these two stocks.
The on-land transportation market is also a market I would stay away from in hydrogen. We've seen passenger vehicle manufacturers abandon hydrogen as a fuel source because batteries are more cost effective and their performance is improving rapidly. I don't see why that dynamic will change in trucking, where Plug Power and Ballard are signing partnerships.
From a market standpoint, the opportunity that has shown to be the biggest and most profitable is clearly in hydrogen for power markets. Bloom Energy has outlined how its products have a greater-than-$2 trillion addressable market, because most of its products are geared toward hydrogen production or sale in the power industry.
It's this huge market, combined with Bloom Power's lower valuation relative to those of peers and better margins, that make this the best stock in hydrogen. Plug Power, FuelCell Energy, and Ballard Power are simply too speculative today, and I think long-term Bloom's business will be bigger than all three. If you want to invest in hydrogen in 2021, Bloom Energy is the place to do it.