We don’t see multi-baggers all that often. But anyone who bought AFC Energy (LSE: AFC) two years ago has already achieved that. And they’d have done even better had they sold at January’s peak — the AFC share price has since fallen 35%.
What’s the fuss about? In these green energy days, electric vehicles are rapidly gaining prominence. But there are two main ways of supplying the energy to drive them. One is using batteries, and the other uses hydrogen fuel cells. There are advantages and disadvantages to both.
AFC contributes to the hydrogen business, developing alkaline fuel cells that use the energetic gas to make electricity at the point of consumption. That includes use at electric charging stations too, to generate power on demand rather than taking it from the grid.
The company has lined up some key new contracts over the past 12 months, and that’s helped keep the AFC share price buoyant. I reckon we’re looking at a very promising technological development here. And it’s one that appears to have very wide applicability with potentially great demand.
But that doesn’t necessarily mean it’s a good investment right now. In my time I’ve seen many high-tech companies eventually come good, but leaving a string of booms and busts, along with impoverished shareholders, along the way. So would I buy AFC Energy shares now?
Plenty of cash
Interim results released in June showed one key bit of progress — AFC actually has revenue. At £150,000 in the half, it’s not a lot, but it’s a start. The firm is probably still some way from profit, mind, recording a loss of £3.3m in the period (up from £1.8m in the first half of 2020). AFC puts that down to “investment in product development and increased headcount.“
The company has been raising capital. As well as strategic investments from partners, AFC raised £36m in April in an oversubscribed offering. So it doesn’t look like there’s been any trouble getting hold of cash, which I’d say is a good sign. At the halfway stage, there was £61.6m cash on the books (compared to just £2.8m a year previously).
We’re looking at a promising growth company here, still in its early cash-burn days. And that’s the kind of investment I usually keep a good bargepole distance from. I’ve just seen so many crash and burn over the years. And even of those that end up successful, early investors are often diluted out of it by later capital raises.
AFC share price support?
In this case though, there’s a lot of cash compared to the firm’s current loss rate. So I doubt there’ll be a need for fresh injections any time soon. There might even be enough to see AFC through to profitability. I think there’s a pretty good chance the AFC share price could be significantly ahead in five or 10 years’ time. But then again, the 2021 bubble might pop.
I’m not going to invest. Unprofitable growth stocks still in their cash-burn phase just don’t figure in my strategy these days. I will keep watching though.