Morningstar Equity Analyst: Bloom Energy: Data Center Demand Comes to Fruition; Raising Fair Value Estimate 50%
Below is a statement from Brett Castelli, equity analyst at Morningstar:
On Nov. 14, Bloom Energy and American Electric Power announced that the US utility has agreed to purchase up to 1 gigawatt of Bloom's solid oxide fuel cells for data centers and other large energy users. Bloom shares are up 50% at the time of writing on Nov. 15.
Why it matters: We have viewed the outlook for Bloom as bifurcated and largely dependent on orders from large, power-hungry data centers for its natural-gas-powered fuel cells. Put simply, the up to 1 GW order is a potential gamechanger for Bloom. The company delivered less than 300 megawatts of fuel cells in 2023 and has delivered 1.3 GW cumulatively in its history. We had questions about whether Bloom's fuel cells had sufficient power density to meet the needs of large energy users, such as hyperscale data centers, which can be 1 GW or more in size. We see the AEP agreement as an important step forward in answering this question.
The bottom line: We are raising our fair value estimate by 50% to $15 after raising our long-term revenue and margin assumptions. Despite our substantial fair value estimate raise, we view shares as approximately 25% overvalued following the large share price move. We see potential further upside from similar deals with other utilities looking to meet data center load. However, this optimism is balanced by potential headwinds from the expiration of the fuel cell investment tax credit (ITC) at year-end 2024.
Big picture: The inflection in power demand, in part due to data centers, is leaving utilities and technology companies scrambling for energy sources. With possible new nuclear power plants not online until the 2030s, natural gas turbines taking three years from time of order to delivery, and connection to the grid multiple years in some cases, Bloom's 24x7 solid oxide fuel cells are well-suited to solve near-term power needs.
Between the lines: The agreement is for up to 1 GW, but AEP only placed an initial order for 100 megawatts, with further expansion orders expected in 2025.
The fuel cells will be customer-sited (behind-the-meter) and will not send any energy back to the electric grid. Initially, the projects will run on natural gas, however, the fuel cells have the potential to use hydrogen as an alternative fuel over time.
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