$FCEL is a global leader in sustainable clean energy technologies, focusing on energy, safety, and urbanization. FuelCell provides their proprietary hydrogen and carbon capturing technologies, which if commercialized, represents a large opportunity and addressable market.
FuelCell provides solutions to their business, utilities, and government (and government-related) customers worldwide. These target customers are typically the large-scale power consumers, however there are some smaller-scale customers especially in small European countries. No matter their size or power consumption, FuelCell can craft/provide a solution for them.
FuelCell's business model includes 3 main streams of revenues, which include: Power platform/component sales, recurring service revenues, and renewable attribute sales. These streams of revenue will be discussed further in the “Investment Information” section of this report.
I believe that this position will be geared to a longer-term hold, and as a result of this ideology, taking a look at their long-term strategy makes the most sense. FuelCell has a 3-pillar long-term growth strategy which covers the following:
This pillar focuses on building a strong balance sheet that will help them achieve long-term financial health and success. This includes improving their liquidity, which they have already taken strides to doing so in 2020 through their public offering. Typically, public offerings are frowned upon by investors, however, they are using the proceeds to build a foundation/framework to deliver long-term results to their investors. Overall, from a long-term investor standpoint, I do not mind this, as long as it does not get excessive, and they have clear plans for how they plan to use the proceeds. Additionally, FuelCell focused their efforts on getting their cost of borrowing down, which will help them to lower their cost of capital. This should help FuelCell get the funds they need for future projects/expansions, also, this is good for long-term investors as they are making efforts to reduce their cost of capital, which will make the DCF and their business more attractive to long-term investors.
This pillar focuses on making the necessary investments into enhancing performance, lowering costs, and generating higher returns. Furthermore, this pillar focuses on addressing their backlog to secure stable sources of funding moving forward.
This pillar focuses on product/service development, FuelCell wants to offer the best products and services, and they believe the best way to do this is through continued R&D efforts. Furthermore, FuelCell is looking to strengthen their customer relationships to generate streams of recurring revenue, and to leverage these relationships into potential expansion opportunities down the line.
FuelCell has provided the following list of advantages of using fuel cells:
Furthermore, FuelCell has provided the following infographic which compares Fuel Cells to traditional energy generation techniques. As you can see in the image linked at the end of this article, Fuel Cells may not be the best choice for every individual category, however they are by far the best all-around choice for energy generation.
License agreements can provide FuelCell with various benefits especially in their current development stage. The agreements can help them to improve their technologies, at a significantly reduced cost. Currently, FuelCell has 2 License Agreements, which I will quickly cover:
FuelCell and EMRE entered into this Agreement on October 31st, 2019, and this agreement states that they will work together to continue research and development efforts in exchange for:
This agreement can help FuelCell to drastically lower their R&D costs while being able to make technological breakthroughs in their product. Although they may be foregoing some revenues now (as Exxon will be able to use these technologies for significant discounts), FuelCell will be able to lower their Levelized Cost of Energy (LCOE), which will make their services more attractive (lower user costs), which should generate long-term, sustainable revenue streams.
FuelCell and POSCO Energy first entered into a Cell Technology Transfer and License Agreement (CTTA) in 2012. This agreement gave POSCO the right to manufacture, distribute, and sell select FuelCell products. Part of this agreement includes FuelCell receiving a 3% royalty on POSCO's net product sales and replacement sales. However, in 2019, POSCO spun off the Fuel Cell side of their business and tried to avoid any liability they had to FuelCell as part of their breaching of the contract. Later in 2019, the Korean Electricity Regulatory Committee violated South Korean Laws. In 2020, FuelCell notified POSCO of their breaches of the contract and gave them time to fix it. However, instead of meeting these requirements POSCO decided to go court.
In hindsight, this was a very bad idea as this legal battle dragged on for months, and FuelCell came out victorious and this contract was officially terminated and POSCO had to pay FuelCell all of their legal costs, and the damages FuelCell incurred as a result of the spin-off company (up to $200M).
But the drama did not stop there, as POSCO filed an $800M lawsuit against FuelCell in late 2020 which did not seem to materialize onto anything.
Overall, FuelCell received $86M of funding from POSCO for research and development efforts since 2007. This funding was crucial for FuelCell and helped them to evolve their products into what they are today.
R&D Costs with Licensing Agreements:
Just to show you how much of a financial impact these licensing agreements have on FuelCell, their 2020 total research and development costs were $21.05M, and only 22% of that cost ($4.8M) was paid by FuelCell. These agreements help FuelCell to maintain low operating expenses, while being able to develop the technologies that they are able to develop. Some of their competitors have R&D costs of $35.5M, $27.9M, and $551M. Assuming their R&D costs decrease proportionally with their market cap, these companies would exhibit R&D costs of $17.3M, $4.1M, and $27.6M. This puts FuelCell right on par with their competitor with the lowest (relative) R&D cost.
FuelCell has a long history of rampant share dilution, and their dilutionary habits still exist today. Just in 2021 alone, FuelCell has increased their # of shares outstanding by over 13%. These levels of dilution are very unfavourable for investors even knowing that there is a large potential for $FCEL to grow into.
One of the biggest factors of this year's dilution was through FuelCell's Open Market Sale Agreements with Jeffries LLC, and Barclays Capital Inc. This Agreement warrants a total aggregate offering price of up to $500M. With prices near the $10 mark at this point in time, the offering was capable of bringing approximately 50M shares to the market.
Based off of $FCEL's shares outstanding data, it appears as though 44M shares were purchased in this offering and are the sole reason for this years share dilution. This announcement of the agreement was the main catalyst in $FCEL's 3-month downtrend starting in June of 2021, which decreased the value of their stock by over 50%.
As of FYE 2020, FuelCell had $1.28B in backlogged revenues. In their filing they noted that this revenue could take between 1-20 years to get recognized on their financial reports, however, due to their rapid growth and long term plan, I believe that they can get this done over the next 10 years. This revenue by itself represents the total amount of revenue that FuelCell will generate over the next 10 years. This implies that my DCF model is undervaluing FuelCell, and we will talk about this later.
As observed in my DCF model (linked below (in my original analysis)), we can see the $FCEL has a fair value of $5.52/share, which implies a downside risk to this investment of 49%. However, from their backlog of revenues, we know that this number is underestimating their revenues, and as a result of this the DCF model will have a 20% weighting toward the overall fair value of FCEL.
Price to Book (P/B):
My P/B comparable found the fair value of $FCEL to be $10.12/share, which implies a slight downside risk of 6%. This is very reasonable, and we will see if this is consistent throughout the other comparable ratios.
Enterprise Value to Sales (EV/Revenue):
When comparing $FCEL's EV/Revenue multiple to that of their competitors, we can find FuelCell's fair value to be $6.37/share, which implies a downside risk of 41%. This is not consistent with the previous result and is a rather low estimate. As a result, I underwent one more comparable
Debt to Equity (D/E):
$FCEL's D/E ratio indicates that their fair value is $30/share, which represents a potential upside of 181%. This is also not consistent with the other results, which led me to taking an average of the 3 comparable analyses.
By taking an average of the comparable analyses, I found $FCEL's fair value to be $15.60/share, which indicates an upside potential of 44.5%.
By taking a weighted average (20% and 80%) of $FCEL's DCF and Comparable valuations respectively, I concluded a final $FCEL price target of $13.10/share. This estimate indicates a 21% upside to this investment.
FuelCell is a quickly growing renewable energy stock that has a good long term growth plan, low R&D costs through their Agreements, and are currently undervalued. The biggest negative about FCEL is their high levels of dilution. Overall, my price target is $15.60/share, which implies a 21% upside.