New Electrolyzers Will Accelerate Global Decarbonization And Electrification

Key Takeaways

• Transformational electrolyzer technologies and regulatory tailwinds position Nel for outsized market share, exponential order growth, and margin expansion as green hydrogen adoption accelerates.
  
• Operational streamlining, service revenues, and industry consolidation strengthen Nel's earnings and reduce cyclicality, setting the stage for positive income surprises and pricing power.
  
• Persistent losses, slow customer uptake, rising competition, premature capacity expansion, and regulatory uncertainties threaten Nel's future revenue growth, margins, and financial stability.

Catalysts

A hydrogen company, provides solutions to produce, store, and distribute hydrogen from renewable energy in Norway and internationally.

• Analysts broadly agree that Nel's next-generation electrolyzer platforms will improve efficiency and lower costs, but this likely understates the transformational impact: the pressurized alkaline and new PEM stacks deliver a step change toward modular, standardized mass production at sub-$1,000 per kilowatt, enabling Nel to capture outsized share as the world accelerates industrial adoption of green hydrogen, directly boosting long-term revenue growth and raising margins.
  
• While analyst consensus sees global policy support and regulatory clarity (such as US 45V tax credits) as a tailwind, this undervalues the surge of project bankability and demand that will result-the current regulatory framework secures a decade of strong incentives just as final investment decisions in major projects are imminent, positioning Nel for exponential order backlog expansion and visible revenue acceleration as these mega-projects launch.
  
• Nel's restructuring and cost optimization are only partially reflected in expectations; the halving of cash burn, sharp reduction in headcount, and shift to a lean operating model will deliver operating leverage precisely as revenues ramp, setting up a scenario for significant positive net income surprise as fixed cost absorption intensifies.
  
• With Nel's extensive installed base and a pipeline of large-scale projects, the forthcoming after-sales/service business and digital monitoring solutions are poised to deliver a high-margin, recurring revenue stream-creating a robust earnings floor and de-risking cyclicality just as the industry enters a high-growth phase.
  
• The wave of industry consolidation and competitor exits is accelerating far faster than modeled by most, enabling Nel to gain market share and set technological standards-the resulting scale advantages, pricing power, and ability to influence project design should drive sustainable, above-consensus margin expansion into the late 2020s.

Nel Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Nel compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Nel's revenue will grow by 28.4% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Nel will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Nel's profit margin will increase from -44.0% to the average GB Electrical industry of 5.2% in 3 years.
• If Nel's profit margin were to converge on the industry average, you could expect earnings to reach NOK 122.6 million (and earnings per share of NOK 0.05) by about August 2028, up from NOK -489.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 91.9x on those 2028 earnings, up from -9.1x today. This future PE is lower than the current PE for the GB Electrical industry at 390.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Nel Future Earnings Per Share Growth

Risks

• Nel continues to report negative net income and ongoing cash burn, with second quarter operating cash flow at minus NOK 53 million and negative EBITDA, raising the risk of shareholder dilution from potential future equity raises if unprofitability persists, directly impacting earnings per share and cost of capital.
  
• Slower-than-expected final investment decisions from customers and project delays, as evidenced by the significant decline in order intake and postponements due to uncertain regulatory timelines, signal that the global energy transition and adoption of hydrogen is proceeding more slowly than anticipated, which threatens Nel's future revenue growth and order backlog stability.
  
• The hydrogen sector is experiencing increasing competition, including the exit and consolidation of electrolyzer OEMs and the proliferation of low-cost manufacturing, particularly in Asia, which could put downward pressure on Nel's pricing and lead to margin compression as the industry matures.
  
• The company is expanding and developing new manufacturing capacity and innovative products ahead of demonstrated market demand, increasing the risk of underutilized assets, potential write-downs, and fixed cost absorption challenges, all of which could exert negative pressure on net margins if projected volumes do not materialize.
  
• Regulatory uncertainty remains in crucial markets, exemplified by unresolved specifics around the U.S. 45V hydrogen tax credit and EU hydrogen project incentives, as well as limited effectiveness of instruments like the hydrogen bank auction, all of which could restrict project bankability, delay order realization, and suppress revenues in the medium and long term.

Valuation

• The assumed bullish price target for Nel is NOK3.98, which represents two standard deviations above the consensus price target of NOK2.38. This valuation is based on what can be assumed as the expectations of Nel's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK4.2, and the most bearish reporting a price target of just NOK1.2.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be NOK2.4 billion, earnings will come to NOK122.6 million, and it would be trading on a PE ratio of 91.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of NOK2.42, the bullish analyst price target of NOK3.98 is 39.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.