The demand for finding renewable energy is very high and I think the hype from Gevo, Inc. (NASDAQ: GEVO) is a little out of control, the market is now Realize this because the share price is down more than 40% in the last 12 months. The company remains highly volatile as it has yet to generate any positive net income. I think the risks associated with this and the fact that significant dilution is likely to occur make GEVO a hold now rather than a buy. It has an exciting future, but I think a proof of concept is necessary before suggesting that GEVO is worth buying.I mean, companies need to build a bottom line that’s profitable Trade based on fundamentals, not just speculation.
GEVO is an active player in the renewable fuels sector and is known for its innovative contributions in all areas of the industry. The company operates through three key segments: Gevo, Agricultural Energy and Renewable Natural Gas, each playing a critical role in its mission to advance sustainable and environmentally friendly fuel solutions.
Within these market segments, GEVO offers a wide range of renewable products to meet a wide range 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 product portfolio underscores the company’s commitment to meeting the evolving needs of consumers and industry for cleaner, greener energy. I think the broad range of areas that GEVO aims to serve and operate in is a key factor in its attention.
Additionally, if GEVO continues to expand its capabilities and production levels, there is a clear market that they can serve very effectively. SAF’s TAM exceeds 100 billion gallons per year. With the technology GEVO is developing, they may become a significant player in this market in time if the projects they are brewing also come to fruition on time.
Looking at last quarter’s income statement, I think there are some things that are negative and visible. The first is the degree of dilution the company is undergoing. That’s up quite a bit year over year, to $237 million. This creates increasing risk for shareholders, as a cessation of dilution seems far away. The substantial dilution is due to an increase in the company’s operating expenses, which reached $23 million in the quarter alone, up from $16 million in the first quarter of fiscal 2022. This is a factor because rising interest rates lead to higher corporate interest payments. Going into the next few quarters, I don’t see significant improvement on this front, as GEVO needs to scale its projects and operations to generate enough stable revenue to cover expenses without diluting the stock.
Looking at the company’s current valuation, I have to say it’s quite expensive. Revenues are improving rapidly, which is causing FWD’s p/s to decline rapidly. However, paying 15x sales is still a significant premium compared to other companies in the industry, which is ultimately the deciding factor in why I can’t consider buying the company right now. Given that the company’s revenue is also negative, there’s significant risk of gross profit fluctuations, and poor results could result in a higher P/E ratio and a higher premium. I worry that the market may punish the stock price by lowering valuations to reflect the additional risk and volatility. I wouldn’t consider buying GEVO unless it would be a fairer price based on a P/E ratio of below 2, which is far closer to the median of other companies in the industry.
GEVO discovered that cash is a valuable commodity with limited supply. The company faces the challenge of raising the necessary capital to support its ambitious projects, each of which comes with a hefty price tag, averaging about $850 million. This financial hurdle highlights the importance of obtaining sufficient capital to make these ventures successful. This financial constraint is exacerbated by the current high interest rate environment, which further complicates GEVO’s problems. Rising interest rates could put additional pressure on the financing costs of these projects, potentially eroding margins and lengthening the time to realize return on investment. I think interest rates are going to stay pretty high for a long time, and the market seems to think so. This will add significant interest expense to the income statement and further depress profitability. Currently, TTM interest expense is $2.2 million, up from $1.2 million in 2022. With revenue of just $9.2 million in the last 12 months, there’s a clear need to improve profits and further expand production.
As previously mentioned, NZ1 has faced multiple delays to its estimated completion date, creating uncertainty about the project’s timeline. In addition, the project’s future still depends on receiving financing approval from the U.S. Department of Energy, a process fraught with challenges and uncertainties. Repeated delays in the completion date underscore the complexity of the effort and the obstacles it encountered along the way. The project’s feasibility and financial viability must meet strict standards set by the Department of Energy, making financing approval a key milestone in its achievement. Negative news could further aggravate the stock price, causing it to fall further.
Since GEVO has yet to generate a profitable bottom line, it’s important to keep an eye on the asset base and liability base of the business to understand what problems may arise in the future. GEVO currently has the highest level of cash in its history, at $347 million. With nearly a quarter of operating expenses last quarter at $100 million, this cash position is sufficient to cover expenses for at least about 3 years if expenses remain similar. That means dilution is still possible in the business.
GEVO is an exciting opportunity to reach a variety of markets through the broad range of industries that its services and programs serve. However, the company has yet to release a positive earnings report, which poses significant risks for investors as they would need to resort to stock dilution to raise capital. In my opinion, this approach is likely to continue, ultimately leading me to now rate GEVO as a Hold rather than a Buy. When margins are positive and stay there consistently, I could certainly consider buying the company, depending on price. I’d better not want to pay more than 10x P/E, and preferably less than 9x P/E. It is estimated that this could happen in 2026 if EPS forecasts come true and prices remain unchanged. Therefore, I will be more passive and stick with a Hold rating.