The year started promisingly for shareholders in AFC Energy (LSE: AFC). But after increasing over 40% by early February, the AFC Energy share price has kept falling. Today, it touched a 52-week low after losing 40% of its value in the past year.
That means the firm now has a market capitalisation of little over £100m. I have been looking for some renewable energy shares to add to my portfolio. Could it be a smart move to buy AFC?
To see the firm as a possible bargain, I would need to feel confident in its long-term commercial prospects.
Last year, revenue from customer contracts actually fell slightly, to just £582,000.
But adding together revenue and deferred revenue saw a figure of £2.1m, a sharp jump from the prior year. The business expects this year to see revenue growth as rentals of its fuel cell systems grow along with hydrogen sales.
By focusing on the construction sector with its need for short-term portable power sources, I think AFC has hit on a promising area in which to grow its business.
Unproven business model
But if the outlook is rosy, why has the AFC Energy share price been tumbling?
While the sales outlook seems to offer promise, for now actual sales remain negligible. Meanwhile, the company is heavily lossmaking. Last year saw losses after tax increase from £9.4m to £16.4m.
AFC ended the year with a cash balance of £40m, although it continues to burn cash at an alarming rate.
So although the company has promising technology and a growing client list, it remains to be seen whether it will be able to grow revenues to such a point that it can turn a profit.
If it does manage that, today’s AFC Energy share price could end up looking like a bargain.
Engineering giant ABB paid £2m to AFC last year and the same amount already this year, as part of a partnership that includes a planned sale of multiple AFC products to the company. That shows the serious financial potential that AFC’s products might ultimately have.
If it can ramp up sales to ABB and use that as a proof of concept to woo other potential customers, I think AFC could end up with a very successful business.
The problem I see for now is that a lot remains to be proven.
Companies like ABB often sign agreements with small companies with promising technology. Sometimes they develop into something big, but often they simply wilt away after a couple of years.
AFC is operating in a crowded field. Its financial model remains unproven and it still has to demonstrate that it can scale up production to commercial levels. That is often harder than it may seem.
Those risks mean that, until its business model is truly convincing, I will not be investing in AFC Energy.