Shares of fuel cell stocks have been in the news again recently after Ballard Power Systems (NASDAQ:BLDP) agreed to transfer fuel cell intellectual property to Volkswagen Group for $50 million and signed an engineering service extension that could be worth another $40 million.
The deal renewed hopes that fuel cells will someday play a major role in the auto industry, and as they did a year ago, stocks went crazy on even a little good news. Even though they weren't involved in the deal and make very different products, shares of Plug Power (NASDAQ:PLUG) and Fuel Cell Energy (NASDAQ:FCEL) have jumped recently as well. But is this a short-term pop, or signs of life for the industry?
A strange history for fuel cell stocks
Before I get to whether or not this VW deal means anything to the fuel cell industry, we need to go back to why investors get excited about these stocks and how irrational that excitement can be. Early in 2014, Plug Power signed a deal with Walmart to supply fuel cell solutions to six distribution centers and provide hydrogen supply as well. The market went nuts, thinking that this was the beginning of a revolution for all companies related to fuel cells.
The chart below shows the performance of Ballard, Plug Power, and Fuel Cell Energy in the year leading up to March 25, 2014, the day the industry hit a stock market peak. If you got in on the ground floor, there was clearly a huge opportunity for profit.
But as is usually the case, when investors finally started to learn what fuel cells are and got interested in shares, it was too late to miss the run-up. Since March 25, 2014, shares of all three companies have fallen by more than half, even after the recent bounce.
This should put into context for investors that these are very volatile stocks. Any announcement, good or bad, can send a stock moving sharply higher or lower. With that said, it's important to understand where these companies' fundamentals are as well.
Fundamentals still aren't there
Most of the run-up in fuel cell stocks have coincided with great hope and expectation for the industry. Plug Power's deal with Walmart gave investors hope that the industry could grow like crazy but that hasn't led to much financial success.
In the past year, Plug Power has reported losses of $110.4 million, Ballard Power Systems has lost $13.9 million, and FuelCell Energy has lost $41.3 million.
To make matters worse, Plug Power recently said it wouldn't hit its $130 million revenue target for 2015 and would be closer to $100 million. Reality isn't living up to the hype, and that's why fuel cell stocks have had a rough time since March of last year.
Is this time different?
But this time is different, right? Not so fast.
Stocks have popped in part on hope that automobiles and larger vehicles than forklifts (Plug Power's major market) would be powered by fuel cells. But after Ballard Systems sold its auto related intellectual property to VW, there's no longer major upside in autos for them. Ballard literally gave up its best asset in auto fuel cells. Plug Power is already starting to reign in expectations for its growth, and even the Walmart deal doesn't appear to be bearing fruit as quickly as some had hoped.
Then there's Fuel Cell Energy, which makes larger fuel cells geared toward backup electrical power or on-site electricity generation and has nothing to do with most of Plug Power and Ballard Systems' markets. In trading, it's often along for the ride just because it has "fuel cell" in its name.
Not only is this time not different, I think it's bad news that Ballard is selling IP to an auto company. The one factor that limits upside for fuel cell companies is that it's not all that difficult for auto companies or other competitors to make their own fuel cells. Many of them have been researching the technology for decades. If Ballard is willing to give up that upside for a one-time payment, it's a sign that autos may not be in the future of any of these fuel cell companies.
A high-risk investment
Until fuel cell companies start making a consistent profit, these are going to be incredibly volatile stocks at the whims of the day-to-day mood of the market. At the end of the day, I don't see any fundamental reason for them to be as highly valued as they are today unless new markets start to open up. That's just not happening on a large scale, and that limits upside and makes the risk far too high for me to buy into the fuel cell space.
Travis Hoium has no position in any stocks mentioned. 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.