Down 63% in a year! Should I now buy AFC Energy shares?

AFC Energy shares have crashed. But the battery provider’s unproven business model means our writer still has no plans to invest.

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Investor enthusiasm for renewable energy shares surged for a while. But, in some cases at least, that positive momentum has now reversed. Take fuel cell specialist AFC Energy (LSE: AFC), for example. In the past year, AFC Energy shares have lost 63% of their value.

Could this be the moment to add the company to my investment portfolio? Or might there be more disappointing returns ahead if I do?

Business making progress

The company’s interim results this year provided some grounds for optimism about business progress. For example, revenue from customer contracts grew 85% from the same period last year. Admittedly it was still a measly £276,000, which is peanuts for a company with a £164m market capitalisation. But at least there was strong growth albeit from a small base.

The company also announced that it had received the first commercial order of a key product line from engineering giant ABB. That could be worth up to £4m. AFC has already received a £2m non-refundable deposit from ABB. In a further boost, AFC announced last week that for the first time it had deployed one of its “S” series of power towers at a site in Spain. It was built and commissioned at AFC Energy’s UK factory.

If the zero emission hydrogen technology works well I think this proof of concept could attract a lot of potential sales interest in the construction sector across Europe and beyond. That might be good for sales – and in turn the value of AFC Energy shares.

A lot still to prove

However, while the company’s technology seems slowly to be gaining traction with possible buyers, I think there is a lot of work still to be done.

Real world use of the firm’s products remains at an early stage. It may be that this field experience leads to modification or redesign of the products before wider commercial use. That means that it is hard to know when or even if AFC Energy will be ready to go into the sort of large-scale production I think is needed to justify its current market capitalisation.

On top of that, while revenues grew in the first half, losses increased even faster. They more than doubled to £7.8m. Admittedly AFC Energy is in its development phase and that is often costly for a technology innovator. But making a loss of £7.8m on sales of £276,000 does not look like a long-term commercially viable strategy to me. While the company’s £49m of cash and equivalents at the end of the first half provides ample liquidity for now, I see a risk of future shareholder dilution if the business keeps spending far more than it generates in revenues.

I’m avoiding AFC Energy shares

I like the company’s technology and think it has real potential.

But it also has a lot to prove, not least that it has a commercially viable business model. Until there is more evidence of that, I will not be buying AFC Energy shares for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

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