Bloom Energy Carries Too Much Risk Right Now (NYSE:BE)

Bloom Energy Corporation’s Industry

Bloom Energy Corporation (NYSE:BE) is operating with a mission to help with the adoption of cleaner and emission-free energy sources. They state their product is more reliable and affordable for countries to generate energy from. Right now, the valuation is quite rich and I think the best course of action would be to sell and perhaps re-enter when the share price has come down to more realistic levels in line with my estimates. There are massive markets for them to be a part of, but buying reasonably is vital.

Their business is made up of designing, manufacturing, and selling fuel cells both in North America but also internationally. They have already managed to gather up a larger customer base with some of the larger companies on the Fortune 500.

The company, they have divided itself into three different segments, power generation, hydrogen/carbon capture, and also marine. All with a focus on decarbonization and bringing green energy to the masses. The largest focus the company places on its business is the power generation segment since the TAM here is around $1.4 trillion. A massive market to tap into and become a competitor.

Much of the appeal for customers to buy from Bloom Energy is about the efficiency of their product. It saves space and companies now have more affordable products because of it. Bloom Energy named their product energy servers. These servers are where they store fuel cells. Either natural gas, hydrogen, or biogas. These massive servers then get transported to power generation sites where they get used to generate energy in a clean and emission-free way.

With an already impressive market share of 80% in the US and the same in South Korea, the company has made a name for itself. Now they take aim at Europe instead, where the need for new energy sources is immense.

A Look At The Income Statement

In the latest earnings report that Bloom Energy provides, they showed investors impressive top-line growth for the third quarter of 2022. With the top line being up around 41%, it made me optimistic at least that they could perhaps have this translate into the bottom line becoming positive. But to no avail.

What seemed to keep the company afloat and pay down debt and raise capital was a recent share offering the company had. This acclaimed to $338 million, but of course at the cost of investors as the outstanding shares become worthless.

Even though the company managed to achieve a negative operating margin of 18%, they are still optimistic about them having a positive margin for the full year of 2022. Looking at a QoQ basis, I see they have made some great progress though. In Q2 2022, the operating margin was -42%, which should have any investor scared about putting money into the company.

In the previous quarter, they also had a net loss of $118 million, which was cut in half in Q3 as the company also raised revenues. This could be the reason for the stock going so much higher in the month of August.

Growth Outlook

I mentioned before that the market in which Bloom Energy operates is massive and it’s now up to the management to achieve the growth investors want to see. The power generation market has a TAM of $1.4 trillion, something BE sees as a great opportunity. But their other segments are also in massive markets, with hydrogen/carbon being $340 billion TAM and marine around $70 billion TAM.

The growth story for investors seems to be that as the company is expanding they are also focusing on cost-down opportunities. Something which is laid out in the investor’s presentation the company provided in June. Here they lay out that they will focus on leveraging numbers and also reducing complexity, but above all increasing power density. They could essentially sell more for the space they are using.

As the company is also responsible for maintenance and other services that come with being in the business they are in, they also want to improve the “life expectancy” of its products. This could potentially cut down on maintenance expenses by a lot, and make expansion much easier.

With optimistic outlooks, the company also expects 2022 to be a year where they have positive cash flows. This would in my opinion greatly help them start paying down debt and stop the share dilution.

Investment Risks

Investing in Bloom Energy Corporation does not come without risks of course, as do all types of investments. With BE I have noticed a few issues keeping me away from putting money into the company. The first is that they are yet to be profitable.

Even though in 2023 the EPS is expected to be around $0.11 according to street estimates, the valuation would be incredibly high. It could take years until the company manages to achieve revenues matching the valuation. Therefore, the downside risks of investing now are too much.

But besides the lack of positive net income, I think the history of share dilution also puts me off. Even though cash flows are expected to become positive, I believe they will continue to raise capital through share offerings. Until they stop with such practices, I wouldn’t want to start a position. Looking at the market opportunity and growth, I would expect them to perform rather well. As the push for renewable energy resources is high, both socially and by governments, I think revenues will continue to push higher.

Valuing Bloom Energy Corporation

My estimates are based on what I think the TTM market they are in can provide and also that the management seems eager to gain more market share in key markets like Europe. Looking at the bottom line, I think it will remain negative until 2025 at least as they continue to invest heavily in expansion. Therefore, I also don’t keep any price targets for those years as investing wouldn’t be based on fundamentals, but instead on wishful thinking.

When they get their structure in order and can streamline more work I think that will positively impact the net margins. For the time being though, I think it will be a while until the company sees margins more in line with the sector average. It will be very important to see the expansion of the company into Europe. As they hold a massive market share already in the United States, I think this is the catalyst the company might need.

But as the current share price is a lot higher than what my future estimates are, I think it would present a substantial risk to invest in the company right now. Instead, selling shares and hoping for the market to give the company a more realistic valuation before starting a position again.

Besides looking at the profitability of an expansion in Europe might look at, seeing how they capitalize on their already owned assets is crucial. They have an infrastructure set up already in the United States, but they have a return on assets of -15% which is worrying. Until they find a more profitable way to invest in their company, I don’t think an investment should be made.

Conclusion

Bloom Energy Corporation is operating in a growing market where they hold a large position, around 80% in both North America and South Korea. They have their eyes set on taking on the European market and becoming a player here as well.

But with a lack of positive net income, I struggle to see the appeal of starting a position in the company right now. I think the valuation needs to come down and become more favorable. I want a margin of safety with all my investments, and right now, I don’t have it with BE. But as the markets they are a part of are massive and there will be opportunities for them to generate more and more revenues, I have them as a sell right now. Entering again when the shares drop to more reasonable levels is what I think is best. The valuation seems too rich to make an investment case right now. The future seems bright, but risking your capital on hopeful prospects can quickly turn into a disaster.