Technology Promise Meets Execution Failure

This article first appeared on GuruFocus.

I recall FuelCell Energy being positioned as one of the major players during the green energy surge a few years back. The underlying technology remains impressive and offers significant scaling potential, but actual production capabilities fall short and profit margins remain problematic.

When you factor in insider selling activity alongside the ongoing share dilutionwhich will likely accelerate following October’s sharp price spikethe picture becomes less appealing. At this juncture, I believe investors are better served avoiding this position entirely, leading me to assign it a sell rating.

For comparative performance analysis I’ve selected Bloom Energy (BE), Plug Power (PLUG), Ballard Power Systems (BLDP) and Invesco WilderHill Clean Energy ETF (PBW) given their similar market exposure. Each company is advancing some variant of fuel cell technology, yet as the chart demonstrates, only one has delivered meaningful returns.

FuelCell Energy: Technology Promise Meets Execution Failure

Bloom Energy has been on a massive run this year as it continues to ramp up production and managed to turn both gross, operating and net margins positive on a TTM basis. FCEL, which is today’s stock under examination, remains quite distant from achieving this milestone.

On a YTD basis FCEL has declined nearly 30% yet experienced a surge from below $4 to nearly $12 per share within roughly 2 months. The sector holds considerable promise as a practical alternative for expanding power generation while simultaneously reducing emissions and earning credits for doing so. Several years back it would have proven extremely difficult to identify a clear winner, which explains why I’ve largely avoided this sector entirely. However, given the substantial rallies certain names have experienced this year, I decided to take a closer look. Despite the recent moves, YTD Bloom Energy appears to be the superior opportunity here due to its already-scaled production capabilities and significantly clearer trajectory toward margin improvement, compared to both FCEL and PLUG.

The recent price actionsurging from under $4 to nearly $12 in roughly 8 weekswarrants examination given the broader narrative around AI infrastructure and data center power demands. Investors appear to be extrapolating sector-wide tailwinds to individual names without distinguishing execution capability from addressable market exposure. This creates risk: FCEL is being priced for a scaling story it hasn’t yet demonstrated it can deliver.

I recall FCEL generating substantial discussion several years ago when its technology appeared revolutionary for the green energy transition, as it could assist in capturing carbon emissions and render gas-powered electricity generation far more environmentally sustainable. The company has since repositioned itself more as an opportunity within data centers, aiming to scale alongside the energy requirements these facilities demand.

At its foundation, FCEL operates as an electrochemical technology firm selling what amounts to a platformone that essentially converts natural gas inputs into electricity while capturing a substantial portion of the carbon emissions from this conversion. Given the relatively compact footprint and theoretically high scalability, FCEL could be rapidly deployed at sites where companies are constructing data centers.

FuelCell Energy: Technology Promise Meets Execution Failure

Above is an image depicting the percentage of sales each segment has contributed over the past 5 years, measured at Q3 for all periods. If I drilled down more granularly, the chart would appear slightly less dramatic, but this reflects FCEL’s reality: revenue streams vary heavily from year to year and quarter to quarter. FCEL reports 4 distinct revenue categories: Product, Service, Generation and Advanced Technology. Among these, the most critical for future growth is undoubtedly “Product” as it pertains to the sale of its oxide fuel cells. Applications extend beyond carbon capture to hydrogen generation and general power production as well. The diversified application potential represents an underappreciated strength for FCEL.

Regarding the remaining three segments: Service pertains to revenues generated from multi-year contracts where FCEL essentially maintains the performance of previously installed fuel cells, along with monitoring capabilities. These revenues tend toward greater stability given their recurring nature.

The third segment is Generation, which as the label implies, relates to electricity sales that FCEL itself produces as it maintains an asset base of power generation facilities. Revenues derive from metered output and again can prove relatively stable.

Finally we have the Advanced Technologies segment which instead centers on R&D and co-developing fuel cell installations alongside general carbon capture and hydrogen initiatives. Importantly, a large portion of these revenues are grant-funded, including agreements with companies like ExxonMobil (XOM).

FuelCell Energy: Technology Promise Meets Execution Failure

Above I’ve constructed a graph displaying the gross margins for each revenue category, also covering the same timeframe as the previous table. What immediately stands out is the steady deterioration of both product and advanced technologies margins. Conversely, Generation is posting a strong uptrend, improving from negative 66.7% in Q3 2022 to now negative 24%. Critically, we’d prefer to see the first segment improve much more rapidly given it will likely constitute the primary revenue stream long-term.

FuelCell Energy: Technology Promise Meets Execution Failure

Measured on a 9-month basis for 2025 versus 2024, the results actually appear considerably better with combined revenue growing 64.22% YoY, the majority stemming from increased Product sales. Beyond revenue growth alone, FCEL has also delivered strong gross margin improvement, rising from negative 39.8% to now negative 19.2% YTD. Most of the cost savings originated from the Generation segment. The cited rationale in the 10-Q references lower costs relating to the Toyota Project.

FuelCell Energy: Technology Promise Meets Execution Failure

On the subject of margins, operating margins remain deeply negative at (-98%) though they’ve improved from (-187%) during the first nine months of 2024. I should clarify that I’m using normalized operating losses, meaning I’m excluding the impairment charges the company incurred during 2025 as I believe these don’t represent core operations. The impairment charge in question was described as relating to inventory and goodwill along with certain previous investments.

Impairment expense of $64.5 million for the three months ended July 31, 2025 related to the Company’s prior investments in solid oxide technology, including related goodwill and in-process research and development (“IPR&D”) intangible assets, property, plant and equipment and solid oxide inventory. Of the $64.5 million, approximately $42.1 million was related to property, plant and equipment, approximately $9.0 million was related to inventory, approximately $9.3 million was related to IPR&D intangible assets, and approximately $4.1 million was related to goodwill.

FuelCell Energy: Technology Promise Meets Execution Failure

Over recent years, SG&A costs have declined quite significantly and now align more closely with R&D expenses as a percentage of overall OPEX. This represents a positive signal given the company has also expanded headcount from 316 in 2020 to 584 as of the latest report. More normalized OPEX trajectories from this point forward will make valuing the stock considerably easier.

FuelCell Energy: Technology Promise Meets Execution Failure

Here’s the fundamental issue facing FCEL shareholders: the business is being funded by equity holders, not customers. Even as gross margins have improved from -39.8% to -19.2% YoY, that progress doesn’t accrue to existing owners because the company finances operations through continuous share issuance. This creates a value destruction loop where operational gains are absorbed by dilution before they can compound.

FuelCell Energy: Technology Promise Meets Execution Failure

Generation represents by far the largest segment currently in terms of backlogs. Quite disappointingly, the product segment is barely registering any increase in backlogs even as the company attempts expansion into data centers. This expansion initiative isn’t new, so some impact should have materialized if this represented an appealing proposition for companies. The absence thereof raises concerns.

Currently I don’t observe a viable route to profitability for the company. It has continued underperforming market expectations and even as revenues have climbed, FCEL continues lacking the capability of reducing costs. On one hand you have quite constrained growth in OPEX categories, but since this is a company planning to scale based on fuel cell sales and that cost item remains largely negativeat -11.85% last quarter with years of barely any sales at allI think substantial pessimism here is warranted.

FuelCell Energy: Technology Promise Meets Execution Failure

The diluted share count expanded 45.7% YoYfrom 16.772 million to 24.441 million shares. This means existing shareholders funded operations by diluting their ownership stake by nearly half in a single year, effectively transferring value from owners to the company to cover cash burn. With $174 million in cash against quarterly burn rates, FCEL has runway for another 5-6 quartersbut that runway will be financed through further issuance. The October price spike to $12 almost certainly triggered additional dilution that will appear in the next filing, further eroding per-share economics even if the business improves.

FuelCell Energy: Technology Promise Meets Execution Failure

The purported 30% annual operating expense reductions I don’t view as realisticfrom which specific expense category would that originate? Will the company terminate significant personnel or reduce R&D spending and sacrifice their competitive positioning? Neither option is favorable, so this management statement unfortunately doesn’t carry much weight in my assessment. Unless they can address the fundamental issuewhich is the cost structure of essentially all their revenue categoriesthen there isn’t much of a positive argument here to construct.

The harsh reality is that FCEL isn’t meaningfully closer to profitability today than it was several years ago. The difference instead involves a massive degree of dilution and a backlog which appears to be depleting and worked through, yet not actually translating into even gross profits for the business.

FuelCell Energy: Technology Promise Meets Execution Failure

On a Price/Sales or Price/Book basis the stock doesn’t appear overvalued and to some degree would even imply an undervaluation based on book value. However, due to the restructuring initiative the company announced last yearwhich so far appears to have resulted in the asset base contractingthe valuation that seems attractive is concealing the fact that asset values will likely decrease further, causing the multiple to rise.

Share-based compensation exists in virtually every company, but $8.6 million YTD appears excessive given the business isn’t even producing a gross profit on a consistent basis yet. It has moderated YoY but without it, operating cash flows would have been approximately 8-10% higher. This isn’t the appropriate time to be distributing shares when the company continues underperforming.

It’s worth noting that Renaissance Technologies (Trades, Portfolio) (Trades, Portfolio) disclosed a ~2% stake in September, prior to the recent run-up. This shouldn’t be interpreted as validation of FCEL’s long-term fundamentalsRenaissance operates quantitatively and often exploits volatility and momentum patterns rather than endorsing business execution. Their involvement, if anything, signals that FCEL has become a trading vehicle rather than a compounding investment.

Insider behavior reinforces this picture. The CFO has been selling shares almost immediately upon receiving themholding just 10,138 shares after selling 688 at an average of $8.87 shortly after receiving 1,167 shares. Management isn’t betting on the turnaround they’re pitching to shareholders.

Weighing all of the negativesdisappointing overall margin trajectory over the past 5 years, massive share dilution, and a depleting backlog which isn’t expandingthe stock satisfies the criteria for a sell rating.

The fundamental issue isn’t the technologyit’s the business model. FCEL is funding operations by diluting shareholders, which means even margin improvements don’t create value for existing owners. The 45.7% share count expansion YoY reveals a company that extracts capital from shareholders rather than generating it from customers.

It appears that larger competitors like Bloom Energy will have significantly easier paths to outpacing and maintaining market share as opposed to FCEL. Their cash position is larger and margins are positive as well.

I approached researching this stock thinking the market must have misunderstood the situation, but I must concur and state that FCEL warrants a sell rating when combining all of the negatives I’ve identified here.