Bloom Energy (NYSE:BE) has improved its margins significantly since its listing in 2018. For 2020, the company’s margins were higher than its peers’ though its revenues were largely flat. Despite that, Bloom Energy stock trades at a lower price-to-sales ratio than its fuel cell peers. Let’s take a closer look at why that is the case and how the stock may fare in the long run.
Why Bloom Energy is different
Bloom Energy offers solid oxide fuel cells that use natural gas or biogas as an input fuel. By comparison, Plug Power (NASDAQ:PLUG) and Ballard Power (NASDAQ:BLDP) both offer proton exchange membrane (PEM) fuel cells that take hydrogen gas as an input fuel. On the other hand, FuelCell Energy (NASDAQ:FCEL) uses carbonate fuel cell technology and is also looking to commercialize solid oxide fuel cells.
Essentially, Bloom Energy’s offering right now has limited applications in the stationary power-generation segment. The company’s servers are mainly used as backup power systems, eliminating the need for traditional generators. Bloom Energy is now looking to enter the hydrogen market by offering solid oxide fuel cells that use hydrogen as the input fuel. At the same time, it’s planning to offer electrolyzers, which can generate hydrogen using water and renewable energy as inputs. This will make Bloom Energy’s offering truly environment-friendly and broaden the company’s addressable market significantly.
Solid oxide fuel cells do not require an expensive catalyst like the one that PEM cells need. For that reason, Bloom Energy’s fuel cells can potentially cost less than PEM cells. But whether that actually happens or not remains to be seen. Notably, Bloom Energy hasn’t been profitable so far with its natural or biogas-based fuel cells. Thus, its eventual profitability with higher-cost hydrogen remains questionable. Still, the company has improved its margins compared to its peers.
As the above graph shows, Bloom Energy generated peer-leading gross margins in 2020. Its margins are also showing an upward trend, which can’t be said for most of its peers. The margin growth can be attributed to a consistent reduction in Bloom Energy’s fuel cell costs.
Bloom Energy’s solid oxide fuel cell technology does seem to have cost advantages due, in part, to the absence of the expensive catalyst needed for PEM cells. However, solid oxide fuel cells need higher temperatures to operate, and have longer start-up and stop times compared to PEM cells. For that reason, they aren’t really a viable option for transport applications. Solid oxide fuel cells may, however, be the preferred choice in stationary generation where they can offer material cost advantages over PEM cells. These advantages open a vast avenue for Bloom Energy, a pioneer in this technology.
Bloom Energy’s growth plan
Bloom Energy plans to simultaneously target different segments of the fuel cell market. It plans to expand its current offerings in the international markets. Further, it’s looking to offer carbon capture utilization and storage services to lower the environmental impact of its natural gas-powered fuel cells. It’s also targeting biogas producers to expand its fuel cell offerings in that segment. Finally, Bloom Energy is working to offer its first hydrogen fuel cells and electrolyzers this year.
Notably, the company’s offerings in the international market, as well as its hydrogen products and carbon capture projects, are expected to ramp-up only after 2023.
For 2021, Bloom Energy expects a 23% growth in its revenue. It also expects to approach positive cash flow from operations in the year. Though Bloom Energy’s success in hydrogen fuel cells is uncertain, the company seems to be on track to become profitable in its current offerings. It appears that Bloom Energy knows what it is doing. After operating as a private company for years, it decided to list when it was confident enough about the financial viability of its products.
Bloom Energy’s price-to-sales ratio of around 4 is several times lower than that of other fuel cell companies. With its current offerings, though, Bloom Energy’s market is limited. That could be the reason behind Bloom Energy’s lower valuation.
However, as the company enters into new areas, including hydrogen, its addressable market expands significantly. If it becomes successful in offering hydrogen fuel cells profitably, it should only be a matter of time before this valuation gap narrows. Moreover, the stock is nearly 46% off its high this year, which makes it more attractive.
As discussed above, it won’t be an easy path for Bloom Energy. There are significant risks involved, and conservative investors will do better by taking a wait-and-watch approach for this story to play out.
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