FuelCell Energy has been treading water for the past six months, recording a small return of 4.4% while holding steady at $6.04. The stock also fell short of the S&P 500’s 13.1% gain during that period.
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Why Is FuelCell Energy Not Exciting?
We're swiping left on FuelCell Energy for now. Here are three reasons you should be careful with FCEL and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. FuelCell Energy’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.3% over the last two years was well below its five-year trend. 
2. Cash Burn Ignites Concerns
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.
FuelCell Energy’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 130%, meaning it lit $130.04 of cash on fire for every $100 in revenue.
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 $124.7 million of cash over the last year. With $190.8 million of cash on its balance sheet, the company has around 18 months of runway left (assuming its $136.8 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 bar. With its shares trailing the market in recent months, the stock trades at $6.04 per share (or a forward price-to-sales ratio of 0.8×). 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 one of our all-time favorite software stocks.
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