What a brutal six months it’s been for FuelCell Energy. The stock has dropped 58.1% and now trades at $4.40, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in FuelCell Energy, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even though the stock has become cheaper, we're sitting this one out 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. Weak Backlog Growth Points to Soft Demand
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 $1.31 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 1%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
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 by 73.3 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. If the longer-term trend returns, 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 161%.
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 $184.6 million of cash over the last year, and its $143.5 million of debt exceeds the $110.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
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 isn’t one of our picks. Following the recent decline, the stock trades at $4.40 per share (or 0.5× 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 suggest looking at the most entrenched endpoint security platform on the market.
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