Is Gevo Stock Undervalued?

Gevo (NASDAQ:GEVO) has made waves as a company that specializes in low-carbon renewable fuels. Down 33% for the year, though, some value investors are sniffing around this penny stock to enquire whether it’s currently trading at bargain-basement prices and due an uptick?

Why Did Gevo Fall?

To understand why Gevo took such a large tumble this year, we first need to look at the company’s balance sheet, and in particular examine how it took on a boatload of debt.

From 2020 when the debt was less than a million dollars to 2021 when it soared to $66.8 million (it also increased a fraction to $67.4 million in the most recent fiscal year), Gevo’s financials have flipped upside down.

That level of debt wouldn’t be problematic if the company was generating revenues to the same level as reported in 2018 or even 2019, but the top line has absolutely plummeted to $1.2 million in fiscal year 2022.

And still it gets worse, operating income has grown increasingly negative in virtually every one of the past five years. EBIT, or operating income was reported as:

• 2018: -$22 million
• 2019: -$26 million
• 2020: -$26 million
• 2021: -$55 million
• 2022: -$77 million

With such a rapid rate of cash burn the only question is whether the company has enough to survive. And there, at least, a silver lining exists.

The company has $237 million in cash and $167 million in short-term investments on its balance sheet, an ample level to survive another few years of similarly negative operating income.

Management hasn’t passively looked on in the face of the financial challenges, and has doubled down on building partnerships and broadening its product portfolio.

What Does Wall Street Forecast?

Analysts appear to have bought into management’s strategic shift and placed a consensus $4.48 per share price target on the stock, well above the present trading level.

Our own analysis of cash flows suggests a more modest projections is warranted. We arrive at a fair market value estimate of $1.51 per share, implying upside of 24.8%.

We should highlight that while FY 2022 revenues were poor, quarterly growth appears to have resumed this year with $4.1 million reported in Q1 and $4.2 million reported in Q2.

On a year-over-year basis, the comparisons look other-worldly, with percentage gains of 1,650% and 4,661% respectively.

Obviously the very low base levels from 2022 make those figures look deceptively good. In absolute terms, they are low and management has a lot of uphill sledding to go before turning the ship around fully.

When it comes to future earnings prospects, the Street is relatively optimistic too, but it doesn’t see earnings per share turning positive until 2027.

• 2023 EPS: -$0.26
• 2024 EPS: -$0.26
• 2025 EPS: -$0.29
• 2026 EPS: -$0.10
• 2027 EPS: +$0.05

These earnings-per-share forecasts are not exactly numbers to get investors excited in the near-term but, over the long haul, they are trending in the right direction.

Whether investors can hang on long enough to see their patience bear fruit is a whole other matter.

1 Key Metric Is Elevated

With a market capitalization of close to $280 million, Gevo is trading at 30.7x last twelve month sales, in spite of the drawdown this year in share price.

That’s a lofty figure by any stretch of the imagination but could quickly return to a more normal range if revenue continues to accelerate higher as the past few quarters have revealed.

The lofty price-to-sales ratio suggests that investors are still optimistic about the company’s future growth opportunity and willing to price the shares at a premium.

Regulatory Changes & Market Growth

One reason analysts have remained buoyant is the tailwind from regulatory stipulations that target a 50% reduction in carbon emissions by 2030. Gevo stands to benefit significantly from that policy stance.

So too, the growth in the renewable fuel market – that is estimated to hit $1.7 trillion by 2030 – should support the upward trajectory of Gevo share price during the next few years.

What To Look For Before Buying?

Gevo’s strategic shift to establish partnerships is a double-edged sword that makes it susceptible to the performance of its partners. 

It is also subject to the whims of regulatory policy that could change on a dime if the political tides change.

But most of all, investors need to keep a keen eye on two line items in particular, how negative the operating income is from one quarter to the next and how that is affecting liquidity reserves, specifically cash, on the balance sheet. 

If investors get a whiff of concern that the company will run out of cash they could run for the exits in a hurry and sell the stock down further.

Is Now the Time to Invest in Gevo?

Gevo has fallen from a share price high of almost $15 a couple of years ago to a dollar and change in the interim period.

The collapse has not gone unnoticed by management, who have made a concerted effort to turn the company around through strategic partnerships that have catalyzed a resurgence in revenues.

Still, Gevo trades at a high multiple to sales, though rapid and sustained revenue growth should cause that to dwindle to less elevated levels.

Certainly, analysts are still optimistic about the future of Gevo, and have continued to stick with a price target that is substantially higher than present levels.

So, is now the time to invest? If you are willing to sit on the shares for four to five years when earnings per share are forecast to go positive, you could get lucky and secure a big win, but this isn’t a company that imbibes a whole lot of confidence in shareholders after bringing them on such a rocky road over the past few years. 

The bottom line is if you buy, don’t do so with money you can ill afford to lose because this stock firmly falls into the speculative category.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.