What happened

Renewable energy stock Gevo (GEVO -3.23%) popped Tuesday morning, gaining 13% as of 10:35 a.m. An analyst believes the shares could almost double from here.

So what

Stifel has initiated coverage on Gevo, giving it a buy rating with a price target of $10. With shares trading just short of $5.25 when Stifel's research note came out, the stock was bound to fly high today.

Stifel is optimistic about three things at Gevo:

  • Management's technical expertise.
  • The growing pipeline for Gevo's key project, Net-Zero 1.
  • Gevo's "differentiated exposure to sustainable aviation fuel."

Gevo is an early-stage renewable energy company that uses feedstocks like corn to produce a four-carbon alcohol that's then processed into low-carbon gasoline and jet fuel. It also produces high-protein animal feed.

A farmer inspecting a corn crop.

Image source: Getty Images.

Early this year, Gevo launched its Net-Zero projects, which aim to produce liquid hydrocarbons using renewable energy sources like wind, biogas, and renewable natural gas. Gevo claims engines using the fuel will emit net-zero greenhouse gas emissions.

The concept has already found some takers, including:

  • Delta Airlines (DAL -0.80%)
  • Air Total
  • Commodities trading company Trafigura
  • Scandinavian Airlines System
  • Europe-based chemical company HCS Group.

Gevo's first such Net-Zero project, Net-Zero 1, is being planned in South Dakota, with construction expected to start next year.

During its latest earnings conference call, Gevo said it currently has contracts worth $1.6 billion, and is negotiating contracts that could be worth $20 billion. Those numbers in particular seem to have caught Stifel's attention.

Now what

Gevo's technology sounds promising, but it's important to understand that Net-Zero 1 is still years away from production. There's another number you must know: Gevo now estimates the project will cost $980 million versus the $650 million it projected at the end of 2020.

Meanwhile, revenue more than halved to only $400,000 in its second quarter; it only recently restarted its plant in Luverne, Minnesota, which was shut during the pandemic.

But until Gevo's top line shows concrete growth, it's a risky stock, and I think much of the optimism is already baked into its price given its current market capitalization of $1.15 billion.