What happened
Shares of fuel cell and hydrogen stocks dropped like a rock on Friday after getting some negative reviews from Wall Street. Plug Power (PLUG +3.57%) fell as much as 13.9% and is down 7.4% at 2:25 p.m. EDT. FuelCell Energy (FCEL +1.52%) dropped as much as 13.4% and is now down 8.2%, while Ballard Power Systems (BLDP +5.93%) was down 12.6% and is now off 9.7% today.
Bloom Energy (BE +4.14%) hasn't fallen quite as much, losing 9.7% of its value early today and now trading 6.2% lower. But that may be because it wasn't priced nearly as highly as the other fuel cell and hydrogen stocks.
Image source: Getty Images.
So what
The headline reason fuel cell stocks are down today is that J.P. Morgan analyst Paul Coster gave some negative ratings for Plug Power and FuelCell Energy. For Plug Power, he initiated coverage on the stock with a $60 price target, which is lower than where shares trade today. For FuelCell Energy, he downgraded the stock from neutral to underperform with a $10 price target. That's nearly 40% lower than where shares trade as of this writing.
At the same time, Coster raised his price target for Bloom Energy from $26 to $35 per share, but kept a neutral rating on the stock.
Analyst upgrades and downgrades can often swing a stock wildly, but in this case it pulled the entire industry down. That's not all that surprising given the fact that fuel cell stocks have traded together for much of the past year.
What's notable is that Coster wasn't negative on Plug Power or FuelCell Energy's business, only their valuations. I highlighted earlier this week that price-to-sales multiples for Plug Power, Ballard, and FuelCell Energy were around 100 times, while Bloom Energy's was about eight times. Those multiples are extremely high by any measure and will be for years, even if the industry grows quickly.
Now what
Analyst upgrades and downgrades should always be taken with a grain of salt because they can move a stock short term but aren't generally an indication of a company's prospects long term. Foolish investors should take analyst opinions as a data point in their own thesis, rather than blindly following Wall Street's advice.
It's undeniable that hydrogen and fuel cell stocks are extremely highly valued today. What investors need to consider is if the price is too high to pay.
Looking at the hydrogen and fuel cell landscape, Plug Power, Ballard Power Systems, and FuelCell Energy all have a long history of losses and diluting shareholders with stock sales. And with shares trading at nearly 100 times sales, shares are extremely expensive even if there is improved financial performance.
PLUG Average Diluted Shares Outstanding (Quarterly) data by YCharts
Bloom Energy, which was also down today, trades at a much more reasonable valuation at about eight times sales, although it's also losing money. But the lower price-to-sales multiple and higher gross margins than its competitors makes this the only stock that I would buy on today's dip.
