Why Is The Hydrogen Theme Underperforming This Year?

Our theme of Hydrogen Economy Stocks, which includes the stocks of U.S. listed companies that sell hydrogen fuel cells, related renewable energy equipment, and supply hydrogen gas, has declined by about 13% year-to-date, compared to the S&P 500 which has gained over 16% over the same period. While the hydrogen theme fared reasonably well over 2022, driven by the passage of the Inflation Reduction Act in the U.S., and an increasing urgency to reduce the dependency on fossil fuels given the increase in oil prices following Russia’s invasion of Ukraine, a couple of factors have hurt the theme of late.

Firstly, earnings from hydrogen fuel cell players have been mixed. While FuelCell Energy saw revenue for Q2 2023 more than double, Q2 net loss widened to $35.1 million from a loss of $31 million in the year-ago period. The company’s backlog also fell 23% year-over-year to $1.02 billion. Bloom Energy
BE
also saw its net loss come in wider than expected, with revenue also missing estimates for Q2. Separately, some solar energy companies with exposure to the residential solar space, which are also part of the theme, have been weighed down by regulatory changes in California, the largest solar market in the U.S. Higher interest rates are also making it more expensive to fund renewable energy projects.

So, what’s the outlook like for the theme? Although hydrogen is unlikely to be as big as other renewable energy sources such as solar and wind, it could be crucial in decarbonizing the industrial sector and heavy vehicles. It could also be seen as a medium of storage of renewable electricity. While mostly external factors have been driving the theme of late, investors will need to watch for underlying improvements in hydrogen technology, which still remains somewhat relatively expensive and small-scale. First Solar
FSLR
has been the best-performing stock in our theme rising by nearly 37% year-to-date. On the other side, SunPower, has been the worst performer with its stock down by roughly 50% year-to-date.

First Solar stock looks fairly priced right now and we don’t expect much returns from the stock in the near- to mid-term. But what if you’re looking for a high-performance portfolio with a low downside instead? The Trefis Reinforced Value portfolio has beaten the market consistently while limiting losses during periods of sharp market declines.

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