To say Hydrogen pure-play stocks have rewarded investors handsomely over the past year would be somewhat of an understatement. Several names have delivered massive returns, as investors’ enthusiasm for clean energy stocks has been hard to satiate.
Trying to give context to some of these companies’ towering valuations, J.P. Morgan analyst Paul Coster says it’s easier to justify the elevated enterprise value-to-sales multiples “when viewed against the massive long-term growth prospects for these first-movers in the space.”
By the 2030s, the hydrogen economy’s global TAM (total addressable market) could be worth between $200 and $400 billion.
However, growth prospects aside, when is the lofty multiple no longer justified? Shares of Fuelcell Energy (FCEL), for example, are already up by 59% this year, and by an enormous 752% over the past 12 months. The stock now trades at roughly 50 times price/forward sales and, according to Coster, “looks richly valued.”
To this end, Coster downgraded FCEL’s rating from Neutral (i.e. Hold) to Underperform (i.e. Sell). The analyst has a $10 price target for the shares, indicating a severe 43% drop from current levels. (To watch Coster’s track record, click here)
That’s not to say Coster thinks Fuelcell is a bad company. In fact, the incoming Biden administration will be friendly to the clean energy sector and should help advance the industry.
“We believe policy support will be generally favorable for the fuel cell industry in North America during the Biden administration,” Coster noted, “And we also believe the company’s technology is well positioned for an assortment of de-carbonization applications, including hydrogen production, carbon capture, and low-carbon co-generation solutions.”
Coster also lists several reasons which could change his mind to become more “constructive on the stock.” These include earlier than anticipated commercialization of the company’s SOFC (solid oxide fuel cell) technology for use in hydrogen applications, new large-scale contracts other than those currently in backlog, and a “new partnership that accelerates time to market and enables access to end markets beyond current scope.”
For now, however, while Coster remains “constructive regarding the Alt Energy sector in general,” and he anticipates the stock to “underperform the mean of [his] coverage over the next 6-12 months.”
The rest of the Street appears to think along similar lines. Although 3 additional Holds result in a Hold consensus rating, the average price target is a downbeat one; At $8.63, shares are expected to be changing hands for a 51% discount over the next 12 months. (See FCEL stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.