Hydrogen fuel holds big promise as a clean energy source. Falling costs and an increased governmental push for clean energy recently put fuel cell companies on investors' radar, and top fuel cell stocks all surged significantly last year. Plug Power (PLUG -9.49%) stock rose by nearly ten times during the year. Ballard Power Systems (BLDP -11.05%), which rose the least of all fuel cell stocks, was still up by 225%.
However, investors now seem to be more focused on the risks involved with these stocks. Let's see if the recent fall in fuel cell stock prices presents a buying opportunity.
Correction in fuel cell stocks
After surging in 2020, fuel cell stocks have seen some large declines this year, and are more than 40% off their 2021 highs. FuelCell Energy (FCEL -11.78%) stock has fallen around 68% off its high this year.
Notably, all renewable energy stocks, and not just fuel cell stocks, have seen a decline this year. Fuel cell stocks have been hit harder, in line with their astronomical rise last year.
Not all fuel cells are the same
Fuel cell companies differ in terms of their technology. Plug Power and Ballard Power Systems use the so-called proton-exchange membrane or PEM fuel cell technology, making their fuel cells more suitable for transport applications. While Plug Power's fuel cells are used mainly in forklifts, the company is expanding its focus to other applications, including fuel cell electric vehicles. Ballard Power's primary customers are makers of hydrogen fuel cell-powered buses, trucks, and heavy-duty vehicles.
By comparison, Bloom Energy (BE -2.71%) uses solid oxide fuel cell technology, which is ideal for stationary power generation. FuelCell Energy is also working on solid oxide fuel cells, though it currently uses carbonate fuel cells, which allow the use of fuels other than hydrogen and are less costly than PEM cells.
Image source: Getty Images.
Bloom Energy's low-cost solution helps it generate higher revenue and better margins compared to other companies. However, it doesn't really offer a truly clean solution, which is the primary objective of using fuel cells. Bloom Energy aims to eventually switch to hydrogen fuel for its cells. But its hydrogen-based fuel cells are expected to ramp up by 2023.
So the fuel cell companies use differing technologies, have differentiated markets, and are all working to improve their offerings. Yet none of them are profitable.
Different technologies aren't helping the bottom lines
Fuel cell companies have been incurring losses and burning cash for years. Plug Power, FuelCell Energy, and Ballard Power Systems have never generated annual profits in more than 20 years.
PLUG Net Income (TTM) data by YCharts
Even if falling costs and governmental support make these companies profitable someday, the margins will likely be low. Hydrogen fuel cells that use green hydrogen -- hydrogen generated through the electrolysis of water -- sound like a great idea, but commercializing them profitably is far from easy.
Hydrogen-powered vehicles
Though hydrogen fuel cells have been finding uses in niche segments for years, it was the promise of cars and other vehicles running on hydrogen that probably captivated investors' attention. This could potentially be a huge market for fuel cells. However, developments so far suggest that fuel cell electric vehicles, or FCEVs, may not be all that ubiquitous as hoped. According to the International Energy Agency, around 6.7 million battery electric vehicles were in use globally at the end of 2020. By comparison, only 35,000 FCEVs were in use at the end of that year.
Falling battery costs, increasing availability of charging infrastructure, and improving range and performance have all contributed to rapid growth in the use of batteries in EVs. Notably, fuel cells are still the preferred choice in the heavy-duty segment, as they can provide more range and take less time to refuel. However, due to their limited applications, the growth opportunities for fuel cell companies could be restricted.
High valuations
Right now, fuel cell companies are a long way from achieving profitability. And even if they manage to become profitable, the availability of alternative energy and storage options mean that the companies' abilities to expand margins would likely be extremely limited.
PLUG PS Ratio data by YCharts
All fuel cell stocks, except Bloom Energy, are trading at high price-to-sales ratios. Ballard Power and FuelCell Energy's low average revenue growth makes it extremely hard to justify their high valuations.
PLUG Revenue (Quarterly YoY Growth) data by YCharts
By comparison, though Plug Power has been growing its revenue at a high rate, the company is plagued by several issues. Bloom Energy seems to be the best of the lot in terms of valuation, performance, and growth prospects. However, Bloom Energy is just entering into the hydrogen segment, and still has to prove that it can produce and sell hydrogen fuel cells profitably.
All in all, fuel cell stocks continue to be risky, and the recent fall in prices doesn't make them much more attractive. It is best to watch these stocks from the sidelines for now.
