Wave-energy-based renewable company Ocean Power Technologies, Inc. (OPTT) offers proprietary systems, such as its PB3 PowerBuoy system, that generate power by harnessing the energy of ocean waves, in the United States and internationally. OPTT’s stock has gained 322.3% over the past year on growing investor optimism about the clean energy sector’s prospects.
Closing yesterday’s trading session at $2.96, OPTT’s stock is trading 33.8% below its $7.30 all-time high, which it hit on January 25. While the stock has gained 23.9% over the past month, it has lost 4.5% over the past three months.
Pandemic-induced delays in OPTT’s revenue-generating projects negatively impacted the company’s top line in its last reported quarter. Its revenue has shrunk, and its profit margin remained negative. Although the clean energy hype has been driving its shares up over the past year, OPTT’s current valuation is not justified, given the high losses and expenses incurred by the company. So, we think the stock could suffer a pullback in the near term.
Here is what we think could influence OPTT’s performance in the near term:
Ocean Energy Solutions Are Expensive
While wave energy solutions are reliable renewable energy sources for next-generation power production and possess huge potential for growth, the biggest problem that the ocean energy companies face is high development and maintenance costs and scalability associated with wave energy systems. Although wave energy could become the next big thing in the clean energy transition, it is still a nascent market. As such, predicting costs can be difficult.
So, while companies like OPTT have immense potential to grow in this emerging market, durability and higher expenses could be recurring issues.
Acquisition Can Put Pressure on Financials
Earlier this year, OPTT acquired 3Dent Technology, LLC, an offshore energy engineering company, to expand the company’s autonomous clean ocean energy offerings and data solutions. The transaction included an amount of stock equal to $800,000 (based on the closing price on December 11, 2020). Although 3Dent’s expertise in offshore engineering should allow OPTT to expand its market reach, it could negatively impact its already weak cash balance.
Unimpressive Financials and Profitability
OPTT’s total revenue was $0.3 million, representing a 57.1% year-over-year decrease in its fiscal third quarter, ended January 31, 2021. Furthermore, the company’s gross loss came in at $381,000, compared to a $44, 000 gross profit in the third quarter of 2020. OPTT’s operating loss increased 7.4% year-over-year to $3.16 million. Also, it reported a $3.15 million net loss, up 7.9% from its year-ago value.
The company’s 0.02% trailing-12-month asset turnover ratio is 96.8% lower than the 0.8% industry average. Also, OPTT’s trailing-12-month gross profit margin and cash from operations are negative 47.2% and 10.47 million, respectively, and its trailing-12-month ROA and ROE are negative 13% and 24.5%, respectively.
Stretched Valuation
Currently, OPTT looks extremely expensive. In terms of trailing-12-month Price/Sales, the stock is currently trading at 50.42x, which is 2,743.5% higher than the 1.77x industry average. Also, its 63.29 trailing-12-month EV/Sales multiple is significantly higher than the 2.13 industry average.
POWR Ratings Reflect Bleak Prospects
OPTT has an overall F rating, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. OPTT has an F grade for Quality. This is reflective of the stock’s weak profitability.
The company has a D Value grade, reflective of its premium valuation. Also, it has a C grade for Growth, in sync with OPTT’s weak financials.
In addition to the grades we’ve highlighted, one can check out additional OPTT ratings for Sentiment, Stability, and Momentum here. OPTT is ranked #13 of 13 stocks in the F-rated Water industry.
Click here to view the top-rated stocks in the Water industry.
Bottom Line
Even though current renewable energy trends have helped OPTT’s stock gain significantly over the past year, the company remains unprofitable. And given that wave energy generation is still a costly affair, it’s no surprise that the company’s growth prospects look bleak. So, we think its stock is best avoided now.
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OPTT shares were trading at $2.87 per share on Tuesday morning, down $0.09 (-3.04%). Year-to-date, OPTT has gained 6.69%, versus a 16.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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