Ballard Power Systems: Profitability Seems Far Out As Costs Are Rising (NASDAQ:BLDP)

Investment Rundown

The market for fuel cell products is still quite new but has several tailwinds ahead that suggest companies in the industry will see very strong demand and revenue growth. The case seems to be however that profitability for these companies is very far out, as some are even struggling to maintain positive gross margins. For Ballard Power Systems Inc. (NASDAQ:BLDP) the last quarter was honestly quite worrisome and didn’t bring the company any closer to profitability. The cost of products and service revenues was higher than the revenues, causing BLDP to have negative gross profits of $5.6 million.

The share price for the company isn’t trading based on fundamentals as margins are negative. The balance sheet however looks somewhat healthy with no long-term debts and a cash position nearing $1 billion. However, it seems like investing in BLDP right now is very early and until there is proof of concept here, I don’t think the company presents a strong enough potential to even be a hold. I find the growing costs to be a major risk and will be rating BLDP a sell as a result.

Company Segments

Ballard Power Systems Inc is a company with direct exposure to the fuel cell industry, which is expected to see very strong demand as it’s viewed as a sound solution to reach critical climate goals. What BLDP does is design, develop and manufacture proton exchange membrane (PEM). The company also offers customers services for the products.

The products are mainly applied to heavy-duty motives, like busses and rail, but also see some marine applications. The company has been operating for over 40 years in the industry and has become a leader in terms of PEM fuel cells. Recently the company has been focusing on expanding the powertrain integration capabilities which is expected to help increase the adoption rate of the technology.

The global emissions are in large part due to transposition, and to reach significant climate goals drastic changes are needed here. This is where BLDP has its addressable market opportunity. There has been a surge in hydrogen projects announced recently and this is heavily benefiting BLDP. According to BLDP themselves there is a $700 billion worth of investments necessary by 2030 that needs to be deployed if we are to reach these goals, so far $230 billion has been committed to this.

As for the revenue streams that BLDP has, they are distributed among three different segments. The largest one is Heavy-Duty Mobility, followed by Stationary, and lastly Emerging And Other Markets. The Heavy-Duty Mobility segments generated $8.7 million in revenue for the last quarter, down from $9.8 million a year prior. As the segment focuses on transportation, the largest end markets are buses and trucks, divided quite equally. The company struggled in this segment as it faced challenges in China relating to Technology Services contracts. But the increase in demand for marine applications helped offset some of the lower revenues.

Markets They Are In

During its many years of operations, BLDP has managed to grow into a global company that doesn’t solely rely on the North American market. 65% of the total backlog of orders is from the European market.

The European market is a very interesting one as the ambitions here are very strong in regards to both producing and importing green hydrogen. By 2030 the goal is to have at least imported 10 million tonnes of renewable hydrogen, which leaves BLDP with a large market to operate in.

Earnings Highlights

As far as translating this growing demand into actual profits, BLDP has been very unsuccessful quite frankly. To set this into perspective, the last time that BLDP had positive net margins is over 10 years ago, back in 2010 they had two quarters with a positive bottom line. Now this is to say that BLDP is never going to reach profitability, but history tells us that they have been struggling. The sector seems to need a large amount of regulatory support to help scale its production and utilization of it. Which could be a catalyst for BLDP, but time will tell.

As for the last quarter though, BLDP had a rough start to 2023. Revenues dropped by 11% YoY, and the gross profits were a negative $5.6 million. But this seems to have been expected by the management, which remained somewhat positive as they noted the policy landscape is easing and orders are coming in more frequently. The remaining part of 2023 is where a lot of the growth will be seen it seems. The Power Products orders have reached $100 million doubling from last year’s levels. This caused the management to say around 70% of FY2023 revenues will come from the second half. But expectations are also that the gross margins will remain under pressure in 2024 also, stating that the revenue mix the company has paired with pricing strategy and investments are the cause for it. This further highlights the likelihood that profitability for BLDP is very far out still.

Risks

With BLDP, the most prominent risk is that the margins just aren’t positive yet, and that means the share price doesn’t have a valuation to fall back on. Any setbacks in the short-term can cause severe share price drops as when a positive bottom line might be reached will have to be adjusted.

With the last report what I reacted to was BLDP managing to see the cost of products drop so little in relation to the drop in revenues. YoY, revenues dropped by 37% for the company, whilst the cost of products only dropped by around 15%. That tells me BLDP will have a tough few quarters ahead as it struggles to maintain competitive pricing and still keep the lights on.

Valuation

In regards to the valuation of BLDP, there aren’t really any fundamentals to base it on. The earnings are negative which results in a negative p/e. As we have discussed, it seems to be far out until we see a positive bottom line, and until then the share price won’t have any historical multiples to fall back.

The shining light in terms of valuation with BLDP, the p/b seems to be rather fair right now. Sitting at 1.16x book value, which is 56% below the sectors average of 2.67. I think it’s dangerous to make a valuation case for BLDP as we need actual fundamentals to base that on. When there are none the risks outweigh the potential in almost all cases. Looking at other companies which are related to the hydrogen industry it’s rather hard to even find one that doesn’t have a negative p/e both Plug Power (PLUG) and Bloom Energy Corporation (BE) have that result. I find the industry still to be in its infancy and that more progress will be needed until we see which companies look the most appealing in terms of starting a position.

Final Words

Right now, I think that investing in BLDP brings way too much risk to a portfolio. A poor history of profitability and what seems like a sticky cost of products are creating a very dangerous situation where the share price might severely drop to reflect the delayed outlook for positive net margins. So far, the estimates are that the EPS will no longer be negative in 2029.

It’s clear that the market for fuel cells and hydrogen is growing at a very fast rate and significant amounts of investments are being poured into it. But the case with BLDP is simply that growing demand is enough to service a buy case. Proof of concept is necessary, otherwise I think an investment is just “dead money” that is better deployed elsewhere. This concludes me rating BLDP a sell right now.