The need to find renewable energy sources is quite high and I think that the hype for Gevo, Inc. (NASDAQ:GEVO) got a little out of hand and the market is now realizing that as the share price is down over 40% in the last 12 months. The company is still heavily volatile as it has yet to produce any positive net income. I think that the risks that are associated with that and the fact that a significant amount of share dilution is likely going to occur makes GEVO a hold rather than a buy right now. It holds an exciting future but I think that proof of concept is necessary before suggesting that GEVO could be a buy. By this, I mean that a profitable bottom line needs to be established for the company to be trading based on fundamentals and not just speculation.
GEVO is a dynamic player in the renewable fuels sector, known for its innovative contributions across various segments of the industry. The company operates through three key segments: Gevo, Agri-Energy, and Renewable Natural Gas, each playing a vital role in its mission to drive sustainable and eco-friendly fuel solutions.
Within these segments, GEVO offers a diverse range of renewable products that cater to a wide spectrum of needs. These include renewable gasoline and diesel, isooctane, isobutanol, sustainable aviation fuel, renewable natural gas, isobutylene, ethanol, and even animal feed and protein. This comprehensive portfolio underscores the company’s commitment to addressing the evolving demands of both consumers and industries for cleaner, more environmentally friendly energy sources. The broad set of areas that GEVO aims to serve and operate in I think has been a key factor for all the attention it is receiving.
Furthermore, there is a clear market that GEVO could serve quite efficiently if they continue to scale up their capabilities and production levels. The TAM for SAF is at over 100 billion gallons per year. With the tech that GEVO is working on they could be a significant player in this market in time, and if the projects they have in the pipeline are achieved on time as well.
Looking at the income statement from the last quarter I think some things are negative and visible. The first one is the amount of share dilution the company is doing. YoY it has risen by quite a lot to 237 million outstanding. This is adding more and more risk to shareholders as the stop of dilution doesn’t seem to be anywhere in sight. The reason for a large amount of dilution comes from the rise in operational expenses for the company, sitting at $23 million for the quarter alone, up from $16 million in Q1 FY2022. This has been a factor because of the rising interest rates causing a higher interest expense amount for the business. Going into the next few quarters I don’t think there will be a significant improvement on this front as GEVO needs to scale up their projects and operations to seal a sufficient amount of steady revenues to pay down expenses without resorting to diluting shares.
Looking at the valuation of the company right now I do have to say it’s quite expensive. The top line is improving very quickly and this is resulting in the p/s decreasing very rapidly on a FWD basis. However, paying 15x sales is still a significant premium in comparison to the rest of the sector and ultimately a deciding factor in why I can’t consider the company a buy right now. Given that the company is also posting a negative top line, there is a significant risk that gross profits may be volatile, and poor results would likely lead to a higher p/s and an even higher premium. I fear that the market would likely punish the share price by cutting the valuation to reflect the additional risk and volatility. I wouldn’t be considering GEVO a buy until based on p/s it reaches under 2, which is far closer to the rest of the sector median, which would be a more fair price to pay.
Cash is a precious commodity that GEVO finds in limited supply. The company faces a challenge in accumulating the necessary funds to support its ambitious projects, each of which carries a substantial price tag, averaging around $850 million. This financial hurdle underscores the importance of securing adequate capital to bring these ventures to fruition successfully. Compounding this financial constraint is the prevailing high-interest rate environment, which further complicates matters for GEVO. Elevated interest rates can exert additional pressure on the cost of financing these projects, potentially eroding profit margins and extending the timeline for achieving a return on investment. I think that interest rates are going to remain quite high for a prolonged period and the markets seem to think the same. This will add a significant amount of interest expenses to the income statement and suppress profitability even more. Right now the TTM interest expenses are at $2.2 million, up from $1.2 million in 2022. With only $9.2 million in revenue in the last 12 months there is a clear need here to raise the margins and scale the production further.
As previously noted, the anticipated completion date for NZ1 has faced delays on multiple occasions, casting uncertainty over the project’s timeline. Furthermore, the project’s future remains contingent on securing financing approval from the DOE, a process fraught with challenges and uncertainties. The recurrent postponements of the completion date underscore the intricate nature of this endeavor and the hurdles it has encountered along the way. The project’s feasibility and financial viability must align with the stringent criteria set by the DOE, making financing approval a pivotal milestone for its realization. The negative news is likely to add further right to the share price and result in the share price falling further.
As GEVO is yet to produce a profitable bottom line it’s important to watch the asset base and liabilities base of the business to see where there may be some issues arising in the future. The cash for GEVO right now is at some of the highest levels in its history, at $347 million. With the last quarter having nearly a quarter of $100 million in operational expenses this cash position is sufficient to cover around 3 years at least if expenses remain similar. That means that dilution is likely to occur still for the business.
GEVO is an exciting opportunity to get exposure to a variety of markets through the broad set of industries it services and plans on servicing as well. The company is yet to produce a positive earnings report though and this is heavily introducing a lot of risk to investors as they need to resort to diluting shares to raise capital. This is a practice that is likely to continue in my opinion and ultimately leads me to rate GEVO a hold rather than a buy right now. When the margins are positive and constantly staying there as well I could consider the company a buy depending on the price of course. Preferably I wouldn’t want to pay more than 10x earnings and even better would be under 9. Estimates suggest that could be in 2026 if EPS estimates come true and the price remains the same. I will therefore be more passive and stick with the hold rating.