In the coming decades, I think renewable energy usage is set to boom. As an investor, that presents me with an opportunity. One area I have been looking into is hydrogen shares. If I invest in them now, could I see better returns this year and beyond than in the stock market overall?
Strong start to 2023
As a long-term investor, my timeframe is years, or even decades. But I was still interested to read that hydrogen shares have performed strongly in the early days of this year. Data from trading and investment specialist Saxo shows the year started strongly for fuel cell and hydrogen shares such as Plug Power, Bloom Energy, Ballard Power Systems, and FuelCell Energy.
All have seen their share prices increase in double-digit percentages so far this year. On a one-year timeframe though, things look very different. Bloom Energy has gained 20%, but the other three companies have seen their share prices fall at least a third in the past year.
According to Peter Garnry, Head of Equity Strategy at Saxo, 2023 “could be the year when hydrogen-related stocks get their big breakthrough.”
Hydrogen shares in focus
What does the price action of hydrogen shares in 2023 tell us? My takeout is that the year has begun with a surge of interest in the sector, helping to push share prices up sharply.
But price momentum on its own is not a reason for me to invest. Buying shares just because they have increased in value and could keep doing so is trading not investment, in my book. Rather, I look to the fundamentals of the companies in question and ask whether I think the shares are trading for less than their intrinsic worth.
Valuing renewable energy shares
One part of the equation in valuing hydrogen shares seems easy to me. A solid business model relies on strong customer demand. I expect demand for hydrogen energy to rise sharply in coming years and to remain high for a long time.
But another element of valuing shares is considering an individual company’s ability to capitalise on demand, by providing products or services that can differentiate it from competitors.
As an example, Bloom Energy holds dozens of patents on its fuel cell technology. That could potentially help it establish a sustainable competitive advantage in the marketplace. But what it does not yet have, in my opinion, is a proven business model. It has been consistently lossmaking. Last year, Bloom’s loss was $165m.
That could change over time, as the market grows and firms commercialise their business models. But, for now, although I expect a growing market for renewable energy, I feel I cannot confidently judge what businesses will benefit from that in the long term.
Sustained positive investor momentum could help hydrogen shares outperform the market this year. But the opposite is also true. Investors may take fright at the lack of profitability in the sector and send the share prices lower, even if the wider market performs well.
Before investing, I am waiting for a hydrogen company with a proven, profitable business model whose shares trade at an attractive valuation.
C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023