There's Reason For Concern Over FuelCell Energy, Inc.'s (NASDAQ:FCEL) Massive 32% Price Jump

FuelCell Energy, Inc. (NASDAQ:FCEL) shareholders have had their patience rewarded with a 32% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

After such a large jump in price, you could be forgiven for thinking FuelCell Energy is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.7x, considering almost half the companies in the United States' Electrical industry have P/S ratios below 1.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for FuelCell Energy

What Does FuelCell Energy's Recent Performance Look Like?

While the industry has experienced revenue growth lately, FuelCell Energy's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on FuelCell Energy.

How Is FuelCell Energy's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like FuelCell Energy's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 74% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 34% each year as estimated by the nine analysts watching the company. With the industry predicted to deliver 68% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it concerning that FuelCell Energy is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From FuelCell Energy's P/S?

FuelCell Energy's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It comes as a surprise to see FuelCell Energy trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for FuelCell Energy you should be aware of.

If these risks are making you reconsider your opinion on FuelCell Energy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.