Bloom Energy's Surge Is A Great Opportunity To Cash Out

seekingalpha11-19

Bloom Energy shares surged 71.8% after announcing a deal with American Electric Power to provide up to 1 GW of fuel cells.Despite revenue growth, Bloom Energy struggles with profitability, cash flow, ...

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the stock remains overvalued and risky.Given the financial issues and valuation concerns, I recommend downgrading Bloom Energy to a 'Sell' despite its long-term potential.Erik Isakson  The past couple of trading days have been a very exciting time for shareholders of alternative energy company Bloom Energy (NYSE:BE). On Friday, November 15th, shares of the business closed up an impressive 59.2%. Even though they were higher earlier in the day, they closed up another 7.9% on November 18th. In total, for the last two trading days, shares have skyrocketed 71.8%. This came after news broke that the company struck a deal with American Electric Power (AEP) whereby it will provide this customer with up to 1 GW (gigawatt) of its products moving forward. For quite a while, Bloom Energy has been an interesting growth story. The increase in demand for alternative energy has led to a surge in revenue for the firm's products and services. However, profits and cash flows have been materially negative. Even into the current fiscal year, the picture is not great. Part of that is because of a recent decline in revenue. However, the fact of the matter is that the company is still just not in a great financial position overall. Admittedly, cash flows are finally positive. But based on my own assessment of the business, it would take far greater cash flow than what the company is currently generating for it to be fairly valued. Despite these problems, I do believe in the company's potential in the long run. Its track record of top-line expansion is also encouraging. But these things have not been positive enough for me to be optimistic from an investment perspective. When I last wrote about the company in August 2022, I rated it a 'hold'. I acknowledged at the time that the company had significant potential. However, I also viewed it as a very risky prospect. Since then, shares have dropped by 22.7% at a time when the S&P 500 is up 39.5%. Normally, this kind of decline would make a company more appealing to me. However, there are reasons behind this drop. And even though the company might have potentially based on this recent development, I actually think it might make sense to consider this a good opportunity to cash out. A major development In a press release issued on November 14th, the management team at Bloom Energy announced that it struck a deal with a major electric provider by the name of American Electric Power, or AEP, in order to provide that customer with up to 1 GW of power generation capacity. In particular, the company is providing AEP with stationary fuel cell power generation that falls under the solid oxide fuel cell category. I don't think a deep dive into this technology is warranted. That is especially because I covered it in my previous article on the firm over two years ago. But in short, the company has created a fuel cell that consists of an anode, an electrolyte, and a cathode. These are placed together and, when oxygen ions react with the fuel cell in question, they produce electricity. This is done all without any sort of combustion reaction. These fuel cells are then stacked together, placed in a casing, and then can be connected to one another in order to generate significant amounts of output. According to management, its fuel cells have high-power density, equivalent to 100 MW worth of output per acre. Over its lifetime, Bloom Energy has created an installed base of 1.43 GW of capacity. So if this 1 GW worth is what is ultimately acquired from the business, it would represent a significant increase in the firm's overall size. AEP Initially, AEP will only acquire 100 MW worth of fuel cells. However, further expansion orders are expected next year. Beyond that, we really don't know what to expect. Assuming all goes well, I do believe that AEP is very likely to acquire all of the 1 GW worth of fuel cells that the announcement claimed. I say this because, during the five years from 2025 through 2029, AEP has already planned to invest $54 billion into capital projects. 25% of this, or $13.4 billion, will be in distribution. Another 22%, or $12 billion, will be for transmission. However, the company plans to put another $9.9 billion into regulated renewables, $4.4 billion into regulated new power generation, and another $0.5 billion into regulated environmental generation capacity. To be honest with you, I'm not exactly sure where on this list it would consider Bloom Energy. In fact, it's entirely possible it's not on the list at all. In its own press release regarding this agreement with Bloom Energy, AEP mentioned that these solid oxide fuel cells will be earmarked for data centers and other large energy users that need to 'quickly power their operations while the grid is built out to accommodate demand'. It further specified that it is currently in the process of finalizing the first consumer project agreements. It's also in discussion with several other customers regarding this opportunity. AEP If everything goes according to plan, all of the costs associated with these projects will be covered by the large customers under a special contract. This is probably for the better because, while the company is forecasting operating cash flow of $41.5 billion over the five years ending in 2029, after paying for capital projects, continuing to pay dividends, and paying back near-term debt maturities, the firm will still be short $32.65 billion. This is even after generating $5.35 billion from asset sales and new equity. Other strategic projects could very well be on the table for it. Plus, investors should expect debt to increase further. AEP It's unclear to what extent this might change the overall trajectory of AEP itself. The fact of the matter is that management is forecasting earnings per share this year of between $5.58 and $5.68. And from 2025 through 2029, it's expecting an annualized growth rate of between 6% and 8% in earnings on a per share basis. We do know that much of the company's growth in the future will come from catering to data centers. This is because they expect commercial load to grow an average of 20% annually specifically because of this. Author - McKinsey Data They aren't the only ones who expect robust growth in the data center category. According to consulting giant McKinsey, data center demand is expected to balloon from 25 GW in 2024 to 80 GW by 2030. The consulting firm believes that generative AI demand will create between $2.6 trillion and $4.4 trillion in economic value on a global scale moving forward. But even if only a quarter of that is realized by the end of this decade, it would still require between 50 GW and 60 GW of additional data center infrastructure in the US alone. As a result of this, it's believed that electricity demand specifically for data centers in the US will grow by 400 terawatt hours from 178 to 606 from this year through 2030. That will take the data center's share of US power demand from 4.3% to 11.7%. Author - SEC EDGAR Data This obviously bodes well for Bloom Energy and companies like it. But the challenge we are faced with is that Bloom Energy specifically has some weaknesses to contend with. In the chart above, you can see financial results for the 2021 through 2023 fiscal years for the business. And in the chart below, you can see results for the first nine months of 2024 compared to the first nine months of 2023. Recently, lower prices and reduced demand has pushed revenue down. During the first nine months of this year, it totaled $901.5 million. That's a drop of 7.7% compared to the $976.6 million reported one year earlier. Management attributed this decline in demand mostly to lower acceptance volume associated with the repowering of PPA V, which was ultimately sold off in the third quarter of last year, and to the effect of a large transaction in the first half of 2023 that did not repeat itself this year. Author - SEC EDGAR Data As you can see in the aforementioned charts, Bloom Energy is at least cash flow positive. Admittedly, this year, the picture is not as good as last year was. And because of the nature of the revenue declines year over year, it's likely that this represents more of a new normal than what we saw in 2023. To really understand how much cash flow the company would need to generate in order to be fairly valued, I would like to point you to the chart below. It looks at how much cash flow the company would need to generate in order to trade at a price to adjusted operating cash flow multiple of either 10 or 20, and the same thing goes with EBITDA for the EV to EBITDA multiple. That's quite a way away from what we have today. Author - SEC EDGAR Data There are other things at this time that bother me quite a bit. For instance, one thing that I do worry about is that the business continues to increase its net debt while simultaneously diluting shareholders. In the chart below, you can see precisely what I mean. The firm went from having $388.2 million in net debt on its books at the end of 2021 to having $989.7 million by the end of the most recent quarter. Furthermore, over that same window of time, shareholders have been diluted by 23.9%. This is most certainly a worrisome trend. Author - SEC EDGAR Data Takeaway  Right now, investors may be excited. But to me, there are a lot of reasons to be pessimistic about the company more broadly. My own assessment indicates that the stock is not even fairly valued. If anything, it's expensive. There is a tremendous amount of potential in this space. And if this leads to other opportunities for the company, it could very well warrant some degree of optimism. In fact, because of this, it's not unthinkable that the business could experience meaningful growth from this point on. But until we see some improvements with the business, particularly from a profit and cash flow perspective, I think it's too early to be optimistic. Add on top of this the aforementioned increase in net debt and continued shareholder dilution, and I would argue that a downgrade of the company to a 'sell' makes sense right now","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484945072"}