The teaser ad I’m reviewing today is from David Fessler, a pitch for his Strategic Trends Investor ($79/yr) that has been running for a few days now. It’s all about a miraculous machine with some little ceramic tiles that will power our world and make us all rich… ready?
Here’s the part of the tease that gets your blood flowing:
“Every decade has a single stock that defines it.
“It’s that one company that creates a new technology, a new product or a whole new industry that’s so innovative and game-changing…
“That it rewards investors with a massive payday.”
And those stocks are easy to find in retrospect, of course, which is what they do in this pitch — noting Walmart from the 1980s, Cisco in the 1990s, Monster Beverage in the 2000s and Netflix in the 2010s, with returns for those ranging from 4,000% to 70,000%.
So ears are perked up when he says “I’ve just identified what I believe is ‘the Next Stock of the Decade.'”
So what business is this new stock in? More hype from the ad:
“It’s a company that has created the most game-changing new technology in the world today.
“60 Minutes has compared it to ‘the holy grail.’
“Yale called the coming spread of this type of technology ‘the next big thing.'”
And he quotes an unnamed shadowy billionaire, who says that this is “The Largest Economic Opportunity of the 21st Century.” In Fessler’s words…
“Those are the words of a billionaire… a member of the Midas List of the very richest people in America… and the secret moneyman behind some of the biggest success stories in history.
“This secretive billionaire was quietly the lead investor in both Amazon and Google.”
Why such a big deal? Here’s a little hype:
“Because this company… which just recently IPO’d and trades for less than $10… is set to become the most important company in America.
“The company was founded by a brilliant NASA rocket scientist.
“He was working on a secret project to create livable environments on the surface of Mars.
“And in doing so, he managed to create a new technology that will forever change the planet Earth.”
Ooooo… secretive high tech investors, Mars scientists, recent IPO — that’s almost all the “get me to quiverin'” levers you can pull in a teaser ad (just add “secret location” and some kind of Indiana Jones story, and I’ll be all but helpless).
So what’s the actual technology? We get some hints about that, too…
“The base component of this technology is just 100 millimeters by 100 millimeters (mm).”
And it’s not just a technology, apparently there’s also some sort of product available…
“The rollout is happening as we speak….
“It has deals in place with Walmart, Google, eBay, Apple, Staples, FedEx, Safeway, Home Depot, Macy’s, AT&T, Honda, Yahoo, Verizon and more.”
So… we know it went public recently, trades near $10, and at that price has a market cap of around a billion dollars — which used to be a lot, but today can still mean you’re a pretty “undiscovered” small cap.
And the technology is some sort of silicon membrane…
“… a simple ceramic tile.
“It’s created using one of the most common and widely available materials on earth… beach sand.
“And on each side, the tile is coated with a special type of ink….
“When you channel electricity into the tile and through the special ink… it creates exactly two byproducts.
“One, breathable air.
“And two, usable natural gas.”
Which means, once you reverse the flow, that you can use air and natural gas to create electricity, without combustion.
So that takes away some of the mystery — that means what they’re teasing here is just a type of fuel cell, something you’ve likely heard of before. Here’s a good basic description of how they work, it basically extracts the energy in hydrocarbons through an electrochemical reaction instead of through combustion — which means that although you’re using fuel, usually something like natural gas, you’re not creating nearly the same level of emissions as you would by burning that fuel — no sulfur dioxide, nitrogen oxide or soot.
So this is, as many of you have already guessed, the long-hyped company Bloom Energy (BE), which was rumored as a possible IPO even before the 2008 financial crisis, but finally did come public about two years ago to some fanfare, rising from the $15 IPO price to over $30 before the late-2018 weak market took the wind out of their sails. The stock has been as low as $2 or so in the past year, and as high as $14 right before the coronavirus collapse. It’s still quite small, the market cap is about $1.4 billion at the recent $11.50 share price, and they do have a meaningful level of revenue, at $740 million over the past year, though revenue growth is low (6%) and their product and operating costs are still very high (gross margin is 12%, the profit margin is negative 50% — meaning it costs them about a billion dollars to generate $740 million in revenue).
Here’s how Bloom describes itself:
“Bloom Energy was founded in 2001 with a mission to make clean, reliable, and affordable energy for everyone in the world. To fulfill this mission, the company has developed a distributed, on-site electric power solution that is redefining the $2.4 trillion electric power market. Our solution is a stationary power generation platform built for the digital age. The Bloom Energy Server is capable of delivering highly reliable, uninterrupted, 24×7 constant (or base load) power that is also clean and sustainable. Commercial and industrial electricity customers are our initial focus and our customer base includes 25 of the Fortune 100 companies. Bloom Energy is headquartered in San Jose, California.”
And that “secret moneyman” quoted in the ad is John Doerr, who is the Chairman of legendary venture capital firm Kleiner Perkins… though the “Largest Economic Opportunity of the 21st Century” quote is actually from 2010, when he was interviewed by 60 Minutes as part of a story on Bloom Energy, and was about clean energy in general (though at the time, Bloom was the first clean energy investment Kleiner Perkins had made).
So since we’re quoting that 2010 story here, I should quote the skeptical stance from a decade ago, too, since it’s probably still at least somewhat relevant — this is from that same 60 Minutes transcript, when they interviewed longtime tech writer Michael Kanellos (he was with GreenTech Media at the time):
“I’m skeptical. I’m hopeful but I’m skeptical. ‘Cause people have tried fuel cells for since the 1830s,” Kanellos said. “And they’re great ideas, right? You know, producing energy at an instant. But they’re not easy. They’re like the divas of industrial equipment. The little plates inside have to work not just for an hour or a day, but they have to work for 30 years, nonstop. And then the box has to be cheap to make.”
“What if he can get the price way down? He claims he can,” Stahl remarked.
“And if he can, the problem is then G.E. and Siemens and other conglomerates probably can do the same thing. I mean they have fuel cell patents. They have research teams that have looked at this. And they have a much greater leeway to actually spread that cost over a lot of products,” Kanellos replied.
BE shares have popped recently, largely because of their announcement last week that they’re partnering with Samsung Heavy Industries to develop fuel cell-powered ships… which, frankly, sounds a long way off (they hope to “present designs” by 2022), but is a huge market and does make a good story, as companies try to come up with ways to meet the 2030 emissions targets for the International Maritime Organization.
The story has certainly changed a lot in ten years, even the product name has been adjusted a bit (from “Bloom Boxes” to “Energy Servers”), but it hasn’t changed as quickly as folks were envisioning back then. Bloom’s reality has not yet caught up with their dreams… John Doerr first backed the company around 2001 when it was just being launched, 19 years ago, and he reportedly envisioned them being public as soon as 2010, with the company planning to be able to produce home-sized “energy servers” by now that might be priced in the $3,000 neighborhood, only a bit more expensive than a whole-house generator.
The costs have stayed stubbornly high, countered somewhat by continuing “green energy” subsidies, and the “Bloom Box” components do have a limited shelf life, so the panels in their fuel cell “stacks” have to be replaced every 5-10 years or so. But still, fuel cells tempt us because they sound so cool, and offer so much potential promise.
I’m a little surprised that Bloom didn’t have a bigger surge in revenue over the past few years, with the California wildfires and huge disaster seasons really pushing companies and homeowners to find energy security from off-grid solutions… but when you look at the numbers, it actually turns out that their revenue growth, while recently disappointing, has at least been better than the generator folks have reported. This chart compares Bloom to Generac (GNRC), the most prominent generator company — that’s Bloom revenue growth in green compared to Generac in orange, so they’ve outgrown them during their short life as a public company so far, yet GNRC shares (blue) have soared far higher than BE since the IPO (red).
The difference, of course, aside from the fact that Generac’s generators burn natural gas or propane while Bloom’s cleaner “Servers” are fuel cells, is that Generac is profitable — so while they’re growing not as quickly even with the boost from wildfires in California, they’re making money and have doubled their net income in three years, while Bloom’s losses have stayed pretty stubbornly high despite their revenue growth.
So Bloom on one hand is a hot tech story, even if it’s getting a little long in the tooth now, and on the other is a capital-intensive seller of fuel cell generators on which they consistently lose money, with a persistent debt burden and no obvious evidence of economies of scale (their cost of goods sold has at least been less than 100% since going public, but the gross margin has not really improved since the end of 2017, and operating expenses as a percent of revenue have also stayed stubbornly high). They need a lot more revenue growth to have a hope of growing into a sustainable business, but unless they also find a way to significantly reduce costs without cutting prices, they might not be able to afford to grow much faster without raising a bunch more money.
Which shouldn’t be hard, particularly these days — there’s money growing on trees, they were able to refinance their convertible debt last quarter on pretty good terms, and their cash burn rate is not terribly dramatic because it looks like they use stock-based compensation to cover much of their employee costs — but you do have to have some imagination to see the company getting a lot better, quickly.
The company’s first quarter shareholder letter lays out the current situation pretty well… and really, it’s still all about the future — still working on their mission to create distributed cleaner energy generation around the world, and recently ramping up their costs to push forward with development of their next generation “Servers”.
There are a few analysts covering the stock, and they expect pretty meaningful revenue growth next year, almost 25% in both 2021 and 2022 (after 2-3% growth in 2020), with improving margins. If that’s how it plays out, then the stock could do just fine from here — but analysts also overestimated BE’s revenues in 2019 by almost 20%, and estimates of that growth have been pretty steadily pushed off into the future since the IPO, so we should take that optimism with a little skepticism.
I want to like Bloom, I think their concept of more distributed energy generation (office buildings having their own fuel cells, etc.) makes sense, both because the electricity grid is getting shakier all the time and for security and efficiency purposes, even if it does rely on the natural gas infrastructure and on regular replacements of fuel cell components… but it’s hard for me to have any confidence that they’re at an inflection point after 20 years of development. It’s a tough business, with meaningful competition and lots of external factors influencing their prospects, and they’ve set themselves up to try to build the company and build market share by selling at a loss for so long now that it’s hard to see when that will change.
Maybe I’m being too skeptical, or too spoiled by the many software companies I’ve been looking at lately which are so much more scalable than these “heavy stuff” businesses like Bloom… and maybe you’ve got reasons to bet on Bloom now — if you’ve looked into this one and have a sense of where the business is going, or are excited about their new technologies or their prospective plans with Samsung, or whatever else, let us know with a comment below… maybe you’ll be able to talk me into getting involved, but for now I’ll watch Bloom Energy from the sidelines.
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Disclosure: Of the companies mentioned above, I own shares of Alphabet and Amazon. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.