By Alex Kimani
Over the past two decades, the renewable energy sector has been besieged by a smorgasbord of challenges, including regulatory issues, U.S. sequestration, overcapacity, bankruptcies, and even the lure of other cheap energy solutions.
However, Renewable Energy 2.0 could very well fall victim to Wall Street’s newest bogeyman: Overvaluation and poor fundamentals.
Over the past three years, the stock markets have been running amok; yet the S&P 500 looks headed for yet another gangbusters performance during president Biden’s first term in office. Wall Street is almost unanimous in predicting the good times to keep rolling, with Goldman Sachs foreseeing another 10.6% jump to 4,300 by year-end. Still, the clean energy sector has been going even wilder, with the iShares Global Clean Energy ETF (ICLN) up 7.4% YTD; Invesco WilderHill Clean Energy ETF (PBW) has gained 28.5%, First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) is up 23.9% while ALPS Clean Energy ETF (ACES) has rallied 22.3% over the timeframe.
Whereas many of those dollars have been flowing to companies with actual earnings and sustainable business plans, a lot more has been going into stocks backed by neither.
And, therein lies the danger for long-term investors.
Here are clean energy stocks that are likely to withstand a big correction better than most.
#1. First-mover advantage
At an extraordinary enterprise value of 160x trailing 12 months EBITDA, it’s very hard to argue that Tesla Inc. (NASDAQ:TSLA) is not patently overvalued.
But Tesla also happens to be a best-of-breed stock with a first-mover advantage in the EV sector. Best of breed stocks represent the most optimal investment choice for a specific sector or industry due to their high quality compared to their competitors.
In other words, Tesla can get away with a lot more than more recent EV upstarts thanks to a much more solid track record.
After all, Tesla could be on track to deliver one million EVs by 2022 thanks to eye-popping demand from China, according to Wedbush. The Wall Street analyst says Tesla could deliver that many vehicles on massive pent-up demand for electric vehicles across all price points in China. Mind you, Tesla delivered ~500K vehicles in 2020 so that estimate could be conservative.
On the other hand, a company like Workhorse Group Inc. (NASDAQ:WKHS) is simply banking on a potentially huge addressable market.
The U.S. delivery van market is massive, with more than 350,000 last-mile delivery vans sold every year. At an average selling price of $50,000, that’s good for a market size of $18 billion.
This $18 billion market is built on the back of legacy, diesel-powered delivery vans that are rapidly falling out of favor. Breakthroughs in EV tech are creating a new class of zero-emission delivery vans that are just as functional as traditional diesel-powered vans, with lower operating costs and high efficiency.
Over the next 5 to 10 years, fleet operators are expected to rapidly upgrade and electrify their fleet resulting in enormous disruption across the entire $18 billion U.S. last-mile delivery van market.
Workhorse happens to be at the epicenter of this disruption, which could mean huge long-term upside potential for WKHS.
That said, Workhorse stock has lately come under pressure after Trucks.com reports of further delays in the U.S. Postal Service process to award contracts for new mail trucks mainly due to the pandemic.
Investors tend to favor companies with first-mover advantage when a shakeout takes hold.
Many companies in burgeoning and growth sectors tend to have thin revenues, are unprofitable and/or suffer from poor cash flows.
The renewable energy sector is not any different.
It’s for this reason that leading hydrogen companies like Plug Power (NASDAQ:PLUG) and Fuel Cell Energy (NASDAQ:FCEL) remain risky bets despite recently turning into Wall Street favorites due to their rather thin revenues.
Indeed, the seemingly blue sky valuations in the hydrogen sector appears to be a case of the tide lifting all boats since the sector has little to show in the way of revenues or profits.
Here again, the market leaders are more likely to withstand a downturn better than their smaller peers.
For instance, Plug Power, the de facto leader of the hydrogen fuel cell sector, is one of a handful of hydrogen companies with a sizable revenue and respectable growth. The company has recorded a seven-quarter streak of uninterrupted revenue and billings growth. During the last quarter, PlugPower reported revenue of $106.99M (+79.9% Y/Y), Adj. EBITDA of $24M and EPS of -$0.04. The company also provided strong guidance as follows:
- Gross billings of $325M-330M from $310M for FY 2020
- Gross billings of $450M for FY 2021
- Gross billings of $1.2B; over 20% Adjusted EBITDA and operating income of $200M by 2024
In other words, PlugPower not only expects to grow its topline ~4-5x over the next four years but also expects to be solidly profitable by the end of the period. Given that trajectory, PlugPower might be able to justify its stratospheric valuation.
On the opposite side of the spectrum, FuelCell has surged more than 230% over the past 30 days alone in a classic FOMO (Fear Of Missing Out) trade. Perhaps it’s not a coincidence that the stock has been rallying hard in the five weeks since Biden was declared the next president of the United States. With Biden pledging net-zero status by 2050 and looking to invest nearly $2 trillion of Federal funds in clean energy if the Democrats win the senate majority, the hydrogen sector has good reason to be excited about what’s to come.
FuelCell has also made a strong case for the role its fuel cells could play in building microgrids by highlighting how California utility regulators recently mandated Public Service Power Shutoffs (“PSPS”) in an effort to avert wildfires led to widespread blackouts, hardship, economic loss, hardship, and other more serious consequences. Unfortunately, FuelCell has not established the kind of strong run that PlugPower has demonstrated, failing to meet revenue expectations twice over the past six quarters despite having a much smaller revenue base–Q3 revenue of $18.7M (-17.6% Y/Y).