FuelCell Energy has gotten torched over the last six months - since July 2024, its stock price has dropped 37.8% to $11.95 per share. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy FuelCell Energy, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Even with the cheaper entry price, we're swiping left on FuelCell Energy for now. Here are three reasons why FCEL doesn't excite us and a stock we'd rather own.

Why Is FuelCell Energy Not Exciting?

Founded in 1969, FuelCell Energy (NASDAQ: FCEL) is a leading manufacturer and developer of carbonate fuel cell technology for stationary power generation.

1. Backlog Declines as Orders Drop

In addition to reported revenue, backlog is a useful data point for analyzing Renewable Energy companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into FuelCell Energy’s future revenue streams.

FuelCell Energy’s backlog came in at $1.16 billion in the latest quarter, and it averaged 4.8% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, FuelCell Energy’s margin dropped meaningfully over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. FuelCell Energy’s free cash flow margin for the trailing 12 months was negative 205%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

FuelCell Energy burned through $230.2 million of cash over the last year. With $160.3 million of cash on its balance sheet, the company has around 8 months of runway left (assuming its $147.6 million of debt isn’t due right away).

Unless the FuelCell Energy’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of FuelCell Energy until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

FuelCell Energy isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at $11.95 per share (or 1.2× forward price-to-sales). The market typically values companies like FuelCell Energy based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at Wabtec, a leading provider of locomotive services benefiting from an upgrade cycle.

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