Bloom Energy Corp. (BE, Financial) is a manufacturer of solid oxide fuel cells that produce electricity on-site for companies and other organizations. Its “Energy Servers” create electricity from methane, providing customers with uninterrupted power as well as reducing both their carbon footprints and water consumption (compared to the power grid).
The company went public in 2018, but its stock market honeymoon was very short-lived.
A painful year but hope for 2020
Bloom has faced economic challenges since it went public. Operating expenses have proven especially difficult to rein in, leading to significant financial losses. During the first nine months of 2019, Bloom booked $667.9 million in revenue, which translated to $139.2 million in operating cash flow and $110.9 million in gross profit. However, operating income was negative over the period, with Bloom posting a $147.4 million operating loss.
With the stock beaten down as far as it has been, some analysts and commentators have identified Bloom as a potential turnaround or deep-value opportunity. Indeed, there appears to be growing hope for a turnaround in 2020. To turn things around, Bloom must achieve two things: reduce operating costs and increase sales.
There were signs of improvement in sales during the third quarter of 2019, which saw acceptances rise to 302, a 47% increase from the previous year (an acceptance is defined as a 100 kW installment of Energy Servers). Revenue was up 23% over the same period, while operating expenses fell 13%, resulting in a 129% increase in gross profit. While these improvements failed to shift Bloom into the black, they did significantly reduce its operating loss, from $66.1 million in the third quarter of 2018 to $24.6 million in 2019.
These developments seem to suggest that Bloom is on the right path. If it can further improve margins and reduce overhead, 2020 might just prove to be an turnaround point for the company’s operations – and its stock price.
Reason for doubt
While Bloom continues to enjoy support from some public boosters, the optimistic outlook does not appear to be well founded upon closer inspection.
Bloom is still bleeding cash and has $330 million in debt due in December 2020, which it cannot hope to repay with organically generated cash flow. While the company had $357.9 million in consolidated cash at the end of the third quarter, it is no surprise that it would blanch at the prospect of emptying its coffers to make the payment. This means that Bloom has little choice but to turn once again to capital markets in order to plug the gap in its finances. Management admitted as much during their most recent investor call:
“Obviously, our goal here will be to refinance or raise new debt no later than the first half of next year. We are focused on doing so, while choosing the best option for our existing shareholders. Or put another way, our primary goal here is to accomplish this with the least amount of dilution.”
Bloom’s continued financial losses would make any hope of raising more debt a dubious proposition at best. With its current debt load equal to nearly half of its total market capitalization, the prospect is even grimmer. Moreover, with the stock down 72% from its IPO and trading with considerable volatility, an equity offering is hardly an attractive alternative. Yet, as Nate Anderson of Hindenburg Research observed on Dec. 19, it is “Never a good idea to raise into a collapsing equity but they need the cash to pay down debt.”
A dilutive offering appears to be imminent, likely before Bloom has to report fourth-quarter earnings.
More red flags
A financial shortfall is far from the only problem facing Bloom. Indeed, there is increasing evidence that the company is not being wholly honest with investors.
Bloom has become increasingly opaque in its definitions and accounting. Of particular issue is Bloom’s treatment of systems upgrades to its fuel cell projects in Delaware. Specifically, the company has decided to treat these system replacements as if they were new product acceptances rather than as service costs, which would be conventional when accounting for stack replacements. Last week, Bank of America (BAC) called out Bloom’s management in a research note:
“Among core investor concerns expressed include the extent of revenue and acceptance associated with the Delaware upgrades in 2Q/3Q, which if excluded would have led to roughly flat acceptances and -$40mn lower revenue y/y in both quarters.”
In other words, both the reported growth in acceptances and improving margins appear to have been overstated substantially. This case of obvious accounting gimmickry casts doubt across all of Bloom’s claims.
Investors’ suspicions should increase still further in light of additional evidence that Bloom’s Delaware upgrades were not one-off events. Most notably, there is a remarkable degree of opacity concerning a number of construction projects in California. Here again, it is unclear whether Bloom’s claimed construction figures represent new deployments or stack replacements.
Verdict
At first glance, Bloom Energy’s contracted share price may seem like an attractive proposition to a contrarian-minded investor. A closer look, however, shows that the stock’s precipitous decline was justified by lacklustre economics. Opaque management and unclear accounting add to this negative perception.
There are plenty of stocks that look unfairly maligned and beaten-down. Bloom is not one of them, and investors should expect more of the same in 2020.
Disclosure: No positions.
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