The Time Might Not Be Right For This Promising Technology
Investors face many risks in technology stocks. Among them is the risk that the technology might be great but the investment in the technology or the company might be premature, That could be the case in Bloom Energy Corporation (NYSE: BE).
Disappointing Earnings Spark a Sell Off
BE reported earnings recently and according to Market Watch,
“Shares of clean-energy provider Bloom Energy Corp. fell [sharply] after the company reported a wider-than-expected loss for the third quarter and trimmed guidance for the fourth quarter.
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The company makes fuel cells that are used in stationary power-generation services to convert natural gas or biogas into electricity. It went public in July with some fanfare, racking up a 67% gain on its first day of trade.
Analysts have generally taken a bullish view of the company, which claims a major advantage over other alternative energy providers in that it provides a constant current of power, unlike wind or solar that have downtimes.
But the stock has floundered after the initial euphoria as investors weigh up risks that include competition from lower utility rates as more renewables are incorporated and a potential shortage of scandium, a rare-earth metal used as an electrolyte.
In the most recent quarter, BE reported a loss of $78.6 million, or 97 cents a share. This was more than the $71.8 million loss, or $6.97 a share, posted in the year-earlier period.
The stark difference in the two loss-per-share numbers stems from the fact that the IPO took place during the quarter, boosting the company’s share count to 81.3 million from 10.3 million a year ago.
The company’s adjusted per-share loss came to 13 cents, better than the 17 cents loss consensus of FactSet analysts. But FactSet was expecting a net loss of just $56 million. The company said that number was weighed down by $72 million of stock-based compensation expenses related to the IPO.
Revenue rose to $190.2 million from $93.8 million, beating the FactSet consensus of $186 million.
But acceptances, or actual deployments, of 206 were below guidance of 213 to 235, due to project delays. The company only books revenue at the time of system commissioning, moving it out of its backlog and onto the profit and loss account.
On its earnings call, the company described a “perfect storm” — literally, referring to delays caused by hurricanes on the east coast and wildfires in California, as well as strikes and other delays at some its utility clients.
Bloom is now expecting fourth-quarter acceptances of between 225 and 275, the midpoint of which is lower than it was originally expecting.
That’s because one anticipated order and acceptance has been pushed to the first quarter of 2019, Chief Financial Officer Randy Furr told analysts on the call, according to a FactSet transcript.
JPMorgan analysts said the company needs to improve forecasting…
Analysts noted “and do a better job of de-risking guidance to cultivate investor loyalty, but revenue and EBITDA is delayed, not lost, and the firm still seems positioned to achieve roughly 30% gross margins (with introduction of Gen 7.5 servers) and roughly 30% revenue compound average growth rate.”
Oppenheimer maintained its perform rating on the stock, but lowered estimates given the soft guidance. Analysts said investors were likely prepared for higher stock-based compensation costs but may have been surprised by quite how high they were.
“We continue to be bullish on adoption of decentralized power assets and microgrids and BE’s product positioning, but remain on the sidelines as business cycles become better understood,” said Oppenheimer.
Cowen analysts cut their stock price target to $20 from $24 on the report, but stuck with a market perform rating. They are not expecting projects delayed in the third quarter to commence in the current one, given construction blackout periods during the holiday season.
Cowen views biogas as a significant opportunity for Bloom, which is hoping to use what is emitted from landfills, wastewater treatment plants and agriculture to power the systems.
“We see this as a significant opportunity for Bloom Energy to diversify their product offering portfolio and broaden their customer base,” analysts wrote in a note.
KeyBanc analysts struck a bullish tone, reiterating their overweight rating at $27 price target. Analysts described the report as mixed, but supportive of a growth trajectory.
“We are perhaps more disappointed with the free cash flow push-out as BE likely grapples with timing issues related to delivery,” they wrote in a note. “That said, per our follow-up, we are comfortable with timing elements and lumpy construction mandates.”
While analysts were mixed in their opinion, traders were not. Traders were bearish.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
A Bear Call Spread in BE
For BE, we could sell a December 21 $20 call for about $1.40 and buy a December 21 $22.50 call for about $0.72. This trade generates a credit of $0.68, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $68. The credit received when the trade is opened, $68 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $182. The risk can be found by subtracting the difference in the strike prices ($250 or $2.50 times 100 since each contract covers 100 shares) and then subtracting the premium received ($68).
This trade offers a potential return of about 37% of the amount risked for a holding period that is about five weeks. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if BE is below $20 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $182 for this trade in BE.
These are the type of strategies that are explained and used in our TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your income and wealth building goals, click here for details on Options Insider.