The subsidies from the Japanese government will increase the demand for fuel cells.
Japan's 25-year plan will cause the country to import fuel cells, which will create an opportunity for fuel cell manufacturers.
General Electric's decision to enter the fuel cell segment will put considerable pressure on smaller players.
Volatility is the name of the game for the stocks operating in the fuel cell manufacturing sector. These stocks tend to take wild swings on a small piece of news, creating an opportunity for the savvy traders to make some quick gains. The trend is consistent with most of the companies operating in the early stage of life cycle of an industry - fuel cells are going to be an important energy source for a number of applications and the long-term future is certainly bright - however, the short-term price movements will be volatile due to the involvement of traders as well as the emotional reaction to the news.
The most recent movement comes due to two developments: First, General Electric's (NYSE:GE) announcement about the fuel cell manufacturing facility and the second is the subsidy by the Japanese government for fuel cell powered cars. Incidentally, both these developments have had an opposite impact on the stock I am going to focus on in this article, Plug Power (NASDAQ:PLUG). The announcement by GE is a negative for the company as it will increase the competition for Plug Power, and the prospect of fighting with a massive conglomerate will have a negative impact on the company. On the other hand, the second development has had a positive impact on the whole sector - we have seen FuelCell Energy (NASDAQ:FCEL) and Ballard Power Systems (NASDAQ:BLDP) rise on the back of this news. The image below shows the price movement in these three stocks over the last month.
As I mentioned in my previous article about Plug Power, the stock price has been range bound for some time now and it has established $5 as the resistance level. Finally, the stock was able to break the resistance level during the last week on the back of some positive news for the sector. Let's first talk about the positive news.
Japan is going to be an interesting market for fuel cell manufacturers - as we highlighted in our article about FuelCell Energy, the market for clean energy is going to be massive in Japan due to the steps taken by the government. The Japanese Prime Minister, Shinzo Abe, talked about giving $20,000 subsidy for fuel cell vehicles - these vehicles are currently more expensive than the electric and hybrid cars. Major car manufacturers like Toyota (NYSE:TM) and Honda (NYSE:HMC) has already announced plans to introduce next-generation zero-emission hydrogen vehicles. Japan is the first country to give subsidies for fuel cell vehicles and we are likely to see other governments take similar steps as the car manufacturers decide to launch zero-emission hydrogen vehicles.
Japan is particularly focused on increasing the use of hydrogen fuel cells in order to limit the carbon emission. The country has devised a 25-year plan in order to increase the use of hydrogen and fuel cells. There will be 100 new hydrogen fuel stations operating in the most populated areas of the country by 2015. During the period of 2020-30, the country plans to have 5.3 million fuel cells providing energy to the residential customers. And finally, by 2040, the country is planning to have carbon-neutral hydrogen production and reduce the dependence on the fossil fuels to produce hydrogen. As a result of this plan, Japan will need to import fuel cells in order to meet the demand, which is hugely positive news for the fuel cell manufacturers.
Another positive news for Plug Power was the research note by Roth Capital - the investment banking firm raised its price target from $3.75 to $4.75 in a research note and gave a positive outlook for the company. The analysts at Roth Capital believe that the company will be able to meet its full year revenue guidance due to the strong demand in the second half of the year.
Moving onto the negative news for the company - General Electric's decision to jump in the fuel cell sector can be a blow for the fuel cell manufacturers. The conglomerate will certainly have a massive advantage when it comes to resources and the market reach. The company has launched a start-up project, which is focused on solid-oxide fuel cell that can convert 65% of energy in natural gas to electricity. The start-up will have commercial production by 2017, and the systems will have capacity from 1 megawatt to 10 megawatts.
The potential in the fuel cell segments is huge and the major players will certainly look to this segment for some quick growth opportunity. Increased competition will certainly have an impact on the current players and the larger resource base might create problem for smaller players. As a result, we might see some M&A activity in the sector as smaller players will be a target for larger players and current players might also want to consolidate.
Fuel cell sector is very interesting at the moment due to the potential of the technology and the increased emphasis on clean energy. I believe the long-term prospects of the sector are bright and we will see substantial increase in demand for fuel cells. At the same time, we might see some major players jumping in the sector causing intense competition, which might cause some smaller players to be bought by bigger players. Plug Power remains one of the most interesting companies in the sector and its market position will certainly get better as the adoption rate of fuel cells increases.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.