The last 12 months have been a transformative time for the AFC Energy (LSE:AFC) share price. After securing critical new partnerships, the hydrogen company saw its stock rise by more than 200%! But can it continue to grow from here? Or is this a bubble waiting to burst?
The surging AFC share price
AFC Energy is a young provider of hydrogen power-generation solutions. Using its expertise in alkaline fuel cell technology, the business has developed a specialised hydrogen fuel cell stack that can be used in various places — most notably, electric vehicle re-charging stations — for which a prototype has just been completed.
AFC’s technology has rightfully been garnering a lot of interest from investors as the world slowly shifts towards electric vehicles. After all, with more electric-powered cars on the road, the demand for more renewable charging stations is on the rise. And even British Royalty is taking an interest. In May, the business, along with Extreme E, presented its hydrogen fuel cell technology to the Duke of Cambridge.
After years of development, it seems that AFC Energy may be on the verge of becoming a commercial business. Looking at its latest half-year earnings report, the company has finally begun generating revenue, albeit a tiny amount. Meanwhile, the level of interest from potential customers is also on the rise, with 50 prospective enquiries currently being negotiated.
This promising progress may be an indicator of some explosive growth on the horizon for the AFC share price. However, personally, I remain a little sceptical.
The risks remain high
I can’t deny that AFC’s technology is impressive. However, its stock price is absurdly high, in my opinion. Based on today’s share price, AFC’s market capitalisation stands at around £474m despite only having around £1.1m of signed commercial orders on its books. The prospect of 50 new customers that may place multiple orders could undoubtedly send gross income surging. However, there is no guarantee this will ever happen, nor do we know the value of these orders if they were to be placed.
In the meantime, the lack of profitability also introduces additional risks to investors, I feel. However, it’s worth noting that due to an oversubscribed fundraise in April this year, the firm’s cash balance now sits around £61.6m. That should be more than enough to keep the lights on for quite some time, so I’m not as concerned by its liquidity position.
The bottom line
The management team expects multiple new system orders later this year. But there is currently very little information as to what this means from a financial perspective. This frankly enormous pile of unknown variables is a bit of a red flag for me. And combined with a £474m valuation with no substantial fundamentals behind it is a clear indicator of a bubble waiting to burst in my eyes.
It’s entirely possible for this bubble to turn into gold, sending the AFC share price to new highs if it can deliver on expectations. But personally, I’m not interested in taking on that risk. So, I won’t be adding this business to my portfolio today.