Bloom Energy Stock Down 14% Year To Date. Why Are Hydrogen Stocks Underperforming?

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, and companies that supply hydrogen gas, had a tough 2023, declining by about 23% for the year. The theme also remains down by 14% year-to-date in 2024. This compares to the S&P 500, which has remained roughly flat thus far in 2024. The theme has been held back by a couple of factors, including high interest rates which are making project financing more expensive. Moreover, in December, the Treasury Department and the Internal Revenue Service finally proposed rules for availing tax credits for the production of green hydrogen under the Inflation Reduction Act. However, the eligibility rules appear to be very strict and several proposed power plants may not qualify. This also appears to have hurt the broader theme. 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.

Amid the current backdrop, BE stock has suffered a sharp decline of 55% from levels of $30 in early January 2021 to around $13 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 -23% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 CAT, UNP, and GE, and even for the mega-cap 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 December meeting. The U.S. central bank has also signaled that there could be three rate cuts in 2024. This could shore up optimism for sectors such as alternative energy which have been impacted by the Fed’s monetary tightening. Recent earnings from the hydrogen sector have been reasonably 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. The company also recently extended an agreement it had with South Korea’s SK ecoplant Co. to supply 500 megawatts of energy servers through 2027.  While mostly external factors have been driving the theme of late, investors still 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.

[1] Returns as of 1/17/2024
[2] Cumulative total returns since the end of 2016

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