Investing in Hydrogen Stocks: Everything Investors need to know

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Investing in Hydrogen stocks and shares is becoming increasingly popular amongst investors, especially those seeking to capitalise on the global transition to renewable energy. Since the element can be used as an energy source with zero greenhouse gas emissions, it aligns well with the worldwide movement toward a greener environment.

Traditionally, this energy source has been too expensive to be an economically viable replacement for fossil fuels like oil, gas, and coal. And while that’s still the case today, recent innovations and improvements in technology might soon change that.

With that in mind, let’s explore this stock market sector in more detail.

What Are Hydrogen Stocks?

As the name suggests, hydrogen stocks and shares are any business involved in producing hydrogen or related technologies, such as fuel cells. Despite the similarities between the existing companies within this space, each can be categorised into one of three areas:

  • Grey Hydrogen – Companies extracting the element a by-product of the fossil fuel industry. Needless to say, this is not the most environmentally friendly method of acquiring the substance.
  • Blue Hydrogen – Like Grey, the element is extracted from natural gas. The process is not exactly cheap. However, it does produce significantly fewer carbon emissions.
  • Green Hydrogen – These firms use various technologies and methods to extract hydrogen gas from water without producing direct greenhouse gas emissions.

Unsurprisingly, governments worldwide are pushing for greater production of Blue and Green hydrogen. The British government is no exception, highlighting the role of this technology in its Green Industrial Revolution plan. That certainly sounds like an enticing reason to consider investing in hydrogen stocks and shares. However, there are some caveats to be aware of.

The Risks And Challenges Faced By Hydrogen Shares

Enthusiasm around hydrogen solutions for a low-carbon economy has increased. But this hype does not mean the industry isn’t prone to challenges and risks. In fact, there are countless companies operating within this space, barely able to scrape into profitability, let alone survive.

So, let’s go over the main hurdles these groups have to overcome.

  • Fire & Explosion Hazards – Explosions are the top and foremost risks associated with handling hydrogen. When mixed with air and heat, the gas can easily ignite, triggering a potentially catastrophic explosion. And what further adds to the risk is that hydrogen is both colourless and odourless. As a result, leak detection becomes very difficult. Hence, proper handling of hydrogen gas is critical. Plus, in case of an emergency, appropriate fire safety equipment is required.
  • Material Embrittlement – Diffusion of hydrogen gas makes high-yield steels and metals brittle. This affects all the pipes, containers, and machinery components used to produce, transport, and handle the substance. A common problem that arises is hydrogen-assisted cracking (HAC). Consequently, hydrogen producers continuously have to inspect, repair, and replace components within their facilities.
  • Logistical Nightmare – Transporting hydrogen safely involves high-tech equipment to contain the energy. Unsurprisingly this makes the process of delivering the gas from one location to another complicated and expensive. And if any corners are cut, it could result in a tragic accident that would undoubtedly lead to severe reputational and legal damage to the business.
  • Storage – Just like transportation, storing hydrogen is also a very critical job. Thus, hydrogen-powered engines and fuel cells must be leakproof to avoid accidents.
  • Capital Intensive – The cost of producing Green hydrogen through electrolysis has fallen drastically over the years. However, the costs still remain so high today that most companies cannot generate a profit. While that will likely change sometime in the future, for now, it means these firms are dependent on external financing that may not always be available.

Key Financial Metrics To Consider Before Investing In Hydrogen Stocks

Hydrogen stocks have recently gained popularity and are still new to investors. Therefore, understanding how to identify investment-worthy shares within this alternative energy space is becoming more critical. This part of the energy sector is still mainly in its infancy, and plenty of additional research is needed to determine the best method to analyse these companies. However, in my experience so far, I’ve found a handful of financial metrics that I believe paint the clearest picture.

  • Revenue Growth – This is the leading indicator of business growth. A hydrogen stock with decent revenue growth today indicates its ability to secure and fulfil new customer orders.
  • Profits – Eventually, every stock comes down to profitability for measuring business success. A steady increase in earnings represents a good operational performance. There aren’t that many hydrogen stocks in this advantageous position. But for those trending towards profitability, the days of relying on an external capital source are numbered.
  • Market Value Chain – Value chains refer to all the activities that go into producing and understanding areas of cost savings and differentiation. And this is very important for new businesses like hydrogen stocks which can help optimise efforts, eliminate waste, and improve profitability.
  • Return on Sales – This is one of the best financial metrics to identify the company’s operational efficiency.

Key Terms To Know Before Investing In Hydrogen Shares

Being able to analyse hydrogen stocks and shares is undoubtedly essential. However, this can sometimes be confusing, thanks to the jargon used throughout this sector. With that in mind, let’s go over some common expert terms often used in statements and presentations despite seldom being explained:

  • Alkaline Fuel Cell (AFC) – A type of hydrogen and/or oxygen fuel cell in which the electrolyte is concentrated potassium hydroxide (KOH), and hydroxide ions (OH-) are transported from the cathode to the anode.
  • CGH2 – Compressed Gaseous Hydrogen.
  • CH2 – Compressed Hydrogen (also known as CGH 2).
  • Combined Heat and Power (CHP) – also known as cogeneration, CHP is the use of a power station to simultaneously generate both heat and electricity.
  • CNG – Compressed Natural Gas.
  • CSAs – Consolidated Statistical Areas.
  • Density – a measure of mass per unit of volume.
  • DOE – US Department of Energy.
  • EERE – Energy Efficiency and Renewable Energy.
  • EIA – Energy Information Administration.
  • Gallon Gasoline Equivalent (GGE) – is the amount of alternative fuel it takes to equal the energy content of one liquid gallon of gasoline.
  • Liquefied Hydrogen (LH2) – hydrogen in liquid form.
  • MMCFD – million cubic feet per day.

Market Size And Forecasted Growth Of The Hydrogen Industry

Despite the vast amount of hype surrounding hydrogen stocks, the global market in 2020 only stood at $9.8bn. At least, that’s according to a recent report by The Business Research Company. What’s more, its growth over the years has been lacklustre, to say the least, sitting at a compounded annualised return of 3.5% since 2015.

This isn’t too surprising. After all, with the cost of producing hydrogen so high, companies have searched for alternatives in fossil fuels to solve their energy problems. Moving forward, as supply costs fall, the growth rate is expected to pick up, reaching 4.4% annually between now and 2025 reaching $12.2bn.

That’s quite a narrow market opportunity despite many companies trading at multi-billion dollar market capitalisation, potentially indicating the expectations of those investing in hydrogen stocks and shares may be set too high.

Top Hydrogen Stocks In The UK By Market Capitalisation

Company Market Cap. Description
ITM Power (LSE:ITM) £1.29bn Designs and manufacturers specialised electrolysers that can extract hydrogen from water.
Ceres Power (LSE:CRW) £1.0bn Ceres Power Holdings plc is a fuel cell technology and engineering company that engages in the development and commercialisation of fuel cell technology in North America, Asia, and Europe.
AFC Energy (LSE:AFC) £181m AFC Energy plc engages in the development of alkaline fuel cell technology and allied equipment for the generation of clean energy in the United Kingdom.

Top Hydrogen Stocks In The US By Market Capitalisation

Company Market Cap. Description
Plug Power (NASDAQ:PLUG) $9.5bn Plug Power Inc. provides hydrogen fuel cell turnkey solutions for the mobility, material handling, and stationary power markets in North America and internationally.
Nikola (NASDAQ:NKLA) $2.62bn Nikola Corporation operates as a technology innovator and integrator that works to develop energy and transportation solutions.
Hyzon Motors (NASDAQ:HYZN) $1bn Hyzon Motors Inc., a hydrogen mobility company, provides decarbonised solutions for the commercial vehicles market and hydrogen supply infrastructure.
Advent Technology (NASDAQ:ADN) $70.2m Advent Technologies Holdings, Inc., an advanced materials and technology development company, operates in the fuel cell and hydrogen technology markets

Should I Buy Hydrogen Stocks

Scientists believe hydrogen energy is packed with great potential as a source of clean energy. Fuel cells alone have the potential to revolutionise the transportation industry. But despite this seemingly exciting opportunity, there remains a long multi-decade journey ahead before this sector begins to mature. At least, that’s what our current data suggests.

Personally, I’m interested in the opportunities within this space. But I need to perform detailed and thorough research before committing any capital. As a long-term investor, I’m looking for future industry leaders, which are pretty hard to spot at the moment. That’s why if I decide to start investing in hydrogen stocks and shares, I’ll be taking a diversified approach.

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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog does not own any shares in the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.

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