After a period of disappointment, the start of 2023 has brought fresh hope to shareholders in AFC Energy (LSE: AFC). The renewable energy shares have jumped 43% since the start of last month. That still leaves the AFC Energy share price 18% lower than a year ago. But it shows strong positive momentum. Could that continue – and should I add the shares to my portfolio?
Understanding the rise
A good place to start is by considering why the shares have boomed.
Often when a company sees its shares surge by over 40% in a matter of weeks, like AFC has, it reflects some big news announcement investors hope could foreshadow improved business performance.
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For AFC, though, that has not been the case. The company has not released any significant news about its business outlook to the stock market since the beginning of the year.
So I think the rise in the AFC Energy share price may reflect a more widespread rerating of renewable energy stocks in 2023 after a tough time last year. Ceres Power, for example, is up 28% in 2023 but down 18% on a one-year time frame. Meanwhile, ITM Power has added 7% this year but it still 58% lower than a year ago.
Valuing AFC Energy shares
A rising tide may lift all boats, but does AFC Energy stand out from other renewable energy shares in a way that might make its current valuation attractive?
It trades in pennies and has a market capitalisation of around £200m. Revenues remain tiny: just over half a million pounds last year. But the company continues to rack up losses year after year. The red ink after tax last year was £9.4m.
So, clearly, the current valuation reflects investor optimism about the company’s prospects rather than its current commercial performance. The company made considerable progress last year, including the first commercial order for its S Series liquid cooled fuel cell system. It has also been rolling out its power towers in the construction industry. Both developments should be good for revenues.
What comes next?
As it starts to prove its commercial viability, I expect AFC’s sales pipeline to grow. That could enthuse investors and lead to a higher share price. However, I also see risks. Commercialisation has been a slow process so far and it could remain that way.
Sales are not the same as profits. As competitor ITM has shown, sales at too low a price can actually end up making a company’s bottom line worse not better, as servicing costs add up. So I continue to see a risk that AFC will burn cash ramping up its sales efforts. It will likely also need to keep investing in growing manufacturing and servicing capabilities.
For that reason, I am not investing at the moment. With positive news, I think the AFC Energy share price could keep climbing. But for now I do not like its unproven commercial model, so will wait to see how things evolve in the coming year and beyond.
