Whenever a stock like fuel cell system manufacturer Plug Power (NASDAQ:PLUG) jumps by a jaw dropping 3,300% in a matter of months, it is going to draw lots of attention. Can shares of this company really go any higher? Are fuel cell manufacturers Ballard Power Systems (NASDAQ:BLDP) or FuelCell Energy (NASDAQ:FCEL) a better investment? Or are any of these investments anything beyond flashes in the day trader's pan?

Fellow Fools Travis Hoium and Tyler Crowe take a look at the merits of these stocks and debate which ones, if any, are worth your investment dollars long term

Tyler's take
We both covered what we see the market for fuel cells will be over the long term, and yes, the overall market for these energy storage/generation devices will be challenging over the next several years because of stiff competition from cheap natural gas and renewables. Fuel cells will probably not be universally adopted, but will likely find success in a small suite of niche markets.

From an investor's standpoint, though, that doesn't necessarily mean you should completely write off fuel cells. That's because we're not talking about multi-billion dollar manufacturing companies, we're talking about very small players. Even if each company were to only capture 10% of its potential addressable market, it would result in 5-10 times annual sales growth.

Addressable Market

Estimated Market Size

Company Looking to Most directly address market

Annual Sales (LTM)

Hydrogen fuel cell energy storage (forklifts, refrigerated trucking trailers, etc.)

$4 billion 

Plug Power

$26 million 

Gas powered backup & remote power (telecom infrastructure)

$4.5 billion 

Ballard Power Systems

$61 million

Combined Heat & Power Generation

$10-$12 billion 

FuelCell Energy

$187 million

One of the big misconceptions of this space is that all three of these companies are tied together in some way, but this couldn't be further from the truth. In fact, up until Plug Power's recent purchase of ReliOn it was hard to even call it a fuel cell company, because it doesn't actually manufacture fuel cells. So instead of making some broad sweeping assumptions for all three companies, here are some thoughts on all three individually.

Plug Power: Plug is a bizarre creature to completely wrap one's head around. All of its fuel cell systems -- its fancy description for battery replacement packs in forklifts -- are actually powered by Ballard's fuel cell stacks; Plug Power just manufactures the components to make that stack compatible with the battery it is replacing. Plug Power will start making some its own stacks soon, but the company will still likely be subject to supplier prices, and its growth has the largest limitations.

Also, the company is wildly overvalued. There are no earnings or EBITDA to speak of yet, and it's trading at 12 times its current sales when its peers trade in the 3-6 times sales range. If you owned shares back in November, then good for you, but at today's price I can't justify buying it.

Ballard Power Systems: Of the three companies, I'm most optimistic about Ballard. With both hydrogen and gas powered cells, it competes with both Plug Power and FuelCell Energy and addresses markets these other two don't. Ballard will lose its exclusive supplier agreement with Plug at the end of the year, but the contract represents less than 10% of the company's sales, and it will take quite some time before Plug will be able to manufacture all of its fuel cell stack needs, so I'm not worried about that.

Of the three, Ballard has the best gross margins -- 27.5% last year to Plug's (42%) and FuelCell's 5.9% -- and its price-to-sales is reasonable enough that I'm not willing to completely write it off. I'm not completely convinced yet, though, because I would like to see some more steady sales increases. Of the three, this is the one I'm watching the closest.

FuelCell Energy: Despite shares of FuelCell being the cheapest of the three on a price-to-sales basis, I'm most apprehensive of its future. FuelCell's combined heat & power focused fuel cells are in most direct competition with other energy options such as natural gas turbines and renewables, and these options are 20-30% less expensive on a price per kilowatt installed. As long as that premium exists, fuel cells will be an awfully hard sell.

Travis' take
For years, fuel cells have seemed to be just one step away from much wider adoption, which is why it's so easy to get excited about any sign of progress. Three years ago it was a deal with POSCO that sent FuelCell Energy through the roof, and this year it was Plug Power's deal with Wal-Mart that brought investors rushing into fuel cell stocks.

But if we take a step back and look at the long-term revenue trends of these three companies it's like they're running in place, with only FuelCell showing significant growth.

BLDP Revenue (TTM) Chart

BLDP Revenue (TTM) data by YCharts

To start, we can eliminate Plug Power as a good investment option on valuation alone. The materials handling market is interesting, and if Plug Power was worth $50 million like it was a few months ago I could overlook losses and see potential upside for the stock. But at $640 million the company is incredibly overvalued, and I'd see a better short opportunity than buying opportunity.

I agree with Tyler that Ballard provides an interesting opportunity with proton exchange membrane technology that's valuable in telecom backup and materials handling, and I think it would augment renewable energy well. Strategically, Ballard is in the best position, but losing Plug Power as a customer could be a drag, and revenue including Plug Power only grew 13% in the first quarter, so the finances don't really justify trading for 6.3 times sales.

The leaves FuelCell. This is the one company that's demonstrated long-term growth. But FuelCell's revenue growth hasn't even led to anything close to positive earnings or cash flow. That's forced management to sell stock regularly just to stay solvent.

FCEL Average Diluted Shares Outstanding (Quarterly) Chart

FCEL Average Diluted Shares Outstanding (Quarterly) data by YCharts

Management seems to think that profits are around the corner, but that's a narrative we've heard before, and I just don't trust management's ability to make money at this point.

I don't think any of these stocks present a good value or a high probability growth bet. They're all full of promise, but I'm afraid that will never lead to sustainable businesses with real competitive advantages. If I was forced to put money into fuel cells I'd buy a 50/50 split of Ballard and FuelCell, because I can see the potential for both, but risks are just too high to be very bullish.

Tyler's rebuttal
I'm with you on the value thing, but at the rate shares have been dropping over the past month or so I may need to revisit that. Who's to say some impatient investors don't get disappointed by an earnings report or two, or perhaps a company decides to make a huge share issuance that infuriates investors and they sell?

I'm still optimistic that there is room for growth, if simply for the fact that they are all starting from such a small base. For now I'm going to keep an open mind and a watchful eye, because technology is a fickle thing. A technological breakthrough that makes fuel cells more cost competitive -- or even better, at price parity -- with other energy options could be around the corner. Perhaps it's the optimist in me, or perhaps it's watching the cost trends in the solar and wind industry drop over the years, but either way I think there is a chance.

Coining Warren Buffett, there are no called strikes in investing. Could shares spike again on more promising reports? Of course, but I'm ok missing out on that. More important to me is that these companies start to show some tangible results, such as increasing sales at a strong clip and improving margins, before I'm ready to get financially married to one of them.

Travis' rebuttal and conclusion
You're right that a technological breakthrough could change the opportunity altogether. But that's something the fuel cell industry has been talking about for decades. When I started at 3M as an engineering intern in 2001, fuel cells were supposed to be a growth market and 3M was putting millions into research. Companies like General Electric, Honda, and Siemens have all researched fuel cells, and even sell some products, but the fact that they aren't pointing to fuel cells for growth is a bad sign to me.

If we're going to pay up for a company in an emerging market I'd like to see some sort of durable technology lead, a huge potential market, or at the least a profitable base from which to grow from. I don't see that from any of these companies, and with the prospect of huge competitors hovering over the market ready to pounce if a big opportunity does emerge, the risk/reward profile is still too high.

If fuel cell stocks continue to fall and financials improve I'll revisit the situation, but the long-term strategic position of fuel cells combined with the high price of these companies will keep me out of the fuel cell game right now.

At the very least, I think we can agree that a cautious approach is prudent in fuel cells today.

Travis Hoium has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned. You can follow them both on Twitter @flushdrawfool and @TylerCroweFool, respectively  The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.