Are you wondering what are the risks of investing in hydrogen stocks? This article has you covered. Although hydrogen has many useful applications as a source of clean energy, it has its set of downsides and contingencies as well.
This article will explore seven of the most important things to remember for those who wonder what the risks of investing in hydrogen stocks are, starting with the most impactful and then working down.
So here is what to consider before investing in these types of companies.
Key players in the market, like Linde (NASDAQ:LIN) and Air Products & Chemicals (NYSE:APD), are pioneering in hydrogen production and fuel cell technologies. Still, it’s important to keep in mind that their stock prices are also very volatile.
To illustrate this, LIN stock has increased 148.85% over the past five years and trades at $419.42 per share at the time of writing. But it has also dipped as low as $364.38 within the past year.
The prices of hydrogen stocks are subject to developing clean technology momentum and significant governmental policies globally, which can be a boon or a bust, depending on the specific development.
The announcement of the US Inflation Reduction Act and funding for clean hydrogen hubs can improve bullish sentiment. On the other hand, the world’s current reliance on fossil fuels and large CAPEX layouts for hydrogen stocks, and sluggish sales growth (as with Plug Power (NADSAQ:PLUG)) can send their stock prices tumbling.
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Another aspect for investors to consider is that the adoption of hydrogen is not guaranteed. It faces competition, notably from the lithium industry, which poses a significant risk of current investments becoming obsolete with future advancements.
Another threat that makes the future of hydrogen technology uncertain is its potential as an indirect greenhouse gas, which could lead policymakers to look for greener solutions elsewhere.
Still, there are specific industries and situations where hydrogen can be useful and not easily replaceable, such as in the cases of steel and cement production, shipping, and aviation.
The other aspect that makes hydrogen technology uncertain is that developing infrastructure that can handle large-scale hydrogen production and storage is a significant issue. Hydrogen companies must carefully balance this integration with the continued development of the energy source to avoid rendering current investments in infrastructure and technology obsolete.
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There’s a huge financial risk when it comes to building and scaling hydrogen energy production. For example, integrating hydrogen is expected to cost a colossal investment estimated between $6 trillion to $12 trillion from 2025 to 2050.
This presents potentially an enormous market for hydrogen infrastructure companies like Ballard Power Systems (NASDAQ:BLDP) and the like to tap into. Still, this goal may prove too steep for even the most ambitious capitalists to tap into.
At present, producing all of today’s dedicated hydrogen output from electricity would demand an electricity generation of 3,600 TWh, more than the total annual electricity generation of the European Union. But that’s still far off from being an adequate replacement for the world’s energy needs.
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As the hydrogen industry is still very new, there are substantial regulatory risks that surround it that investors should stay cognizant of. There are particular regulatory risks surrounding the green hydrogen sector, which is not yet competitive with grey hydrogen produced from fossil fuels.
Although the urgency to transition to the carbon-free model is a pressing one, uncertainty about the continuation or modification of incentives to make such a transition via green hydrogen can pose a risk to investors and developers who rely on these policies.
Then there’s also the subjective element of how regulators choose to classify different forms of hydrogen (e.g., green, blue, grey), which can determine if the company is eligible to continue receiving subsidies or not, as well as at what rate they can sell their output. These changes can come with little warning, leaving both hydrogen companies and investors susceptible to being blindsided.
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In the future, some analysts expect that hydrogen will work alongside existing renewable sources of energy such as solar and wind, and possibly nuclear to wean the world off thermal coal burning and traditional electrical grids.
For instance, offshore wind energy can be used to produce hydrogen, potentially easing congested power grids by converting and transporting energy as hydrogen rather than electricity.
The problem with this approach, though, is that this may make the profitability of hydrogen production unstable, especially when the market prices for hydrogen are low compared to the production costs. Energy production from wind and solar can fluctuate and also exhibit signs of cyclicality, which presents challenges that may not easily be overcome.
Also, hydrogen’s low energy density and flammability present issues in terms of storage and transportation. This then makes it difficult to transport and may require significant upfront costs and upkeep to ensure it’s a safe and effective energy source.
As stated previously, there is an enormous investment required by the international community in order to get hydrogen production up to an acceptable standard. This cost is because of new CAPEX needed to be outlaid and infrastructure needing to be made from scratch, such as pipelines for transportation and refueling stations for end use in transportation.
This means that many hydrogen companies may be saddled with debt, with poses a significant financial risk for investors. Companies such as Plug Power is perhaps a prime example of this, with nearly a billion dollars of debt and rapidly burning thru its free cash flow quarter to quarter.
The high CAPEX and nascent stage of the hydrogen industry makes it particularly risky. Investors must be confident that they will be adequately compensated for the risk they are taking on, and with the low visibility into the industry’s future, this is very difficult.
Supply Chain Issues
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Supply chain problems can adversely effect all companies, but for hydrogen companies, it can be particularly disruptive. Hydrogen stocks depend on electrolyzers and rare earth elements in order to produce hydrogen.
The gyrations caused by global competition for these materials, geopolitical tensions, and logistical challenges can further hampen the company’s long-term visibility into their revenue and earnings projections.
In the pandemic’s wake, the supply chain caused widespread disruption to companies large and small. We’ve also recently seen problems for oil and shipping companies in the red sea, so the effect of these risks may be unpredictable and not contained to a single effect.
Hydrogen stocks are largely at the mercy of the strength or weakness of the national and international supply chains, which then leaves it in a vulnerable position without a clear way forward.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.
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