Can Hydrogen Players Outperform As The Interest Rate Environment Softens?

Our theme of Hydrogen Economy Stocks, which includes the stocks of U.S. listed companies that sell hydrogen fuel cells such as Bloom Energy (NYSE:BE), related renewable energy equipment players such as SunPower (NASDAQ:SPWR), and companies that supply hydrogen gas, has had a tough year, declining by about 28% year-to-date. This compares to the S&P 500 which has gained 23% over the same period. While the hydrogen theme outperformed over 2022, driven by the passage of the Inflation Reduction Act in the U.S., and an increasing urgency to reduce the dependency on fossil fuels following Russia’s invasion of Ukraine, the theme has been held back this year by a couple of factors, including high interest rates and supply challenges. Separately, some solar energy companies with exposure to the residential solar space, which is also part of the theme, have been weighed down by regulatory changes in California, the largest solar market in the U.S.

BE stock has suffered a sharp decline of 50% from levels of $30 in early January 2021 to around $15 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. BE has had a poor run, with the stock losing value in each of the last 3 years. Returns for the stock were -23% in 2021, -13% in 2022, and -26% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 23% in 2023 (YTD) – indicating that BE underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the industrial sector including BA, UNP, and CAT, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could BE face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Things could get better for the theme in the near to medium term. U.S. inflation has eased considerably in recent months and the Fed has held interest rates steady during its recent December meeting. The central bank has also signaled that there could be three rate cuts in 2024 and this could shore up optimism for sectors such as renewable energy. Recent earnings from the hydrogen sector have been positive. For example, Bloom Energy reported a surprise profit for Q3, on an adjusted basis, with revenue rising by 37% year-over-year to $400 million, topping consensus estimates.  FuelCell Energy also beat revenue estimates for its most recent quarterly report.

While mostly external factors have been driving the theme of late, investors will need to watch for underlying improvements in hydrogen technology, which is not exactly cost-effective at the moment, implying that deployments at the moment are relatively small, making it noncompetitive versus fossil fuels. That said, the U.S. government is significantly incentivizing green hydrogen production as it looks to a potential alternative to oil and gas in heavy industries and trucking where renewable electricity and battery storage are not viable.  For example, the government is considering awarding tax credits to the tune of $3 per kilogram of green hydrogen (produced via renewable energy methods or nuclear power), with the credit scaling down for projects that emit carbon while producing hydrogen.

[1] Month-to-date and year-to-date as of 12/18/2023
[2] Cumulative total returns since the end of 2016

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