- The company needs to increase its customer base in order to decrease dependence on a small number of customers.
- Deal with Plug Power will continue to benefit the company in the short-term, but Ballard will likely lose a big customer after Plug Power's acquisition of ReliOn.
- The volatility in the stock price will continue to exist in the short-term, and will likely remain until the company expands its customer base and decreases volatility in revenues.
Ballard Power Systems (NASDAQ:BLDP) more than doubled over the last year, and despite a fall of over 30% since the start of March, the stock is up over 295% for the past twelve months. The company produces Proton Exchange Membrane [PEM] fuel cell stacks, and the demand for these products is on the rise. PEM fuel cells take hydrogen as fuel and produce electricity through the process of electrolysis. Besides other products and services, the company supplies fuel cell stacks to Plug Power (NASDAQ:PLUG), a company which assembles and distributes these fuel cells.
A Glance at the Earnings
The company recently announced its first quarter earnings, which met the analyst estimates. The company posted a net loss of $3.8 million, or 3 cents per share as compared to $7.9 million for the same period last year. The growth mainly came from the engineering services business, where the revenues grew by more than 180%. In this segment, Ballard lists Volkswagen as its customer, and this segment accounts for more than half of Ballard's revenues. Strong growth in the most important segment of the company is encouraging.
However, Ballard will have to grow its revenues from other segments as well. The customers of the company include Toyota Motors (NYSE:TM) and BAE Systems. The company will have to further diversify its customer base in order to bring stability and diversity to the revenues; too much dependence on a few customers can be negative, and it might result in lower negotiation power for the company.
Plug Power: Friend or Foe?
Plug Power is the market leader of fuel cells in material handling equipment. Most of the growth in Ballard Power Systems is derived by the increasing demand for Plug Power fuel cells in material handling. Recently, Plug power announced that it has landed a contract from Wall-Mart (NYSE:WMT) to supply 1700 fuel cell units, an amount greater than what it has sold to its four largest clients. Following this, the stock of Ballad Power Systems skyrocketed, along with Plug Power's.
Plug Power, on the other hand, has recently made backward integration by acquiring Ballard's competitor, ReliOn, for $4 million. The acquisition will probably result in Ballard losing an important customer, as Plug Power will be able to produce fuel cells on its own. However, Plug Power might not want to enter the market as a competitor for Ballard. Nonetheless, the company will lose an important client, which further highlights the need to increase the customer base, so that the company is not too heavily reliant on a single customer. The supplier exclusivity contract between the Ballard and Plug Power will last until the end of 2014, which means that the company will continue to gain in the short-term.
Ballard Power's Way Out
On the positive side, the company has smartly diversified itself into four different segments. Ballard offers power backup systems for telecom towers. During 2013, the revenues from this particular segment grew by 2%; however, for the first quarter of the current year, this segment has shown a decline of 55%, indicating that the demand is extremely volatile in the segment. However, the adoption rate might pick up as the company continues to experiment on different locations. Telecom towers use backup generators that create a lot of noise, which may not be appreciated in some areas. This is why, PEM fuel cells are being preferred in this industry as backup power.
Ballard cannot rely on Plug Power, and the company needs to further enhance the other business segment: Development Stage Markets. This segment also recorded a decline of 31% during the first quarter of the year as compared to an increase of 52% during the last year - it is a big swing in revenues from both of these segments. In order to have consistent growth in revenues, the company will have to tackle the volatility in these two segments. One of the most positive things for the company is that its largest segment is showing strong growth, and it has some of the biggest players as its customers.
The volatility in the stock price will remain until the company finds a balance between its revenue mix and shows consistent growth. The market is excited by the prospects of businesses operating in this sector, and these stocks have seen a massive rise in prices. The company is showing rapid growth in the largest segment, and the testing of telecom towers in some new locations might result in new orders for the telecom segment as well. However, despite the volatility, the future growth opportunity for the fuel cells is real, and Ballard should be able to exploit this opportunity with slight changes in the customer base.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.