A) Introduction
It's been three months since the publication of our initial bear thesis on Ballard Power Systems Inc. (NASDAQ:BLDP), and it's time to review the risk-reward nature of the position now that the stock has fallen over 38% and hit new 52-week lows:
(click to enlarge)
B) Quick Review of Initial Thesis
The core thesis of the initial article rested on the fact that Ballard sports an extremely expensive relative valuation while remaining unprofitable and dependent on external financing for survival. The company's quarterly earnings releases had consistently been a disaster as well, with three straight misses on analyst consensus EPS estimates and two straight topline misses. Lastly, ‘smart money' investors (i.e. institutional investors and short sellers) had been dumping stock. Overall, we concluded that the company was likely to underperform the overall market by 24.3% over the following 12 months. Recommended it as a strong short candidate.
C) Since Publication
On June 8th, Ballard's stock price briefly gapped up to $2.50 after Ballard announced a $10 million deal to deploy their technology in 33 buses in China. The euphoria surrounding the deal faded quickly as the stock price drifted lower in the weeks afterward before falling more than 30% after the company announced a secondary offering. The offering was for 8,125,000 million common shares at a price of $1.60. This offering price was more than 20% below the stock price at announcement time, and the dilution accordingly led to a steep fall in stock price.
D) Thesis Moving Forward
Moving forward, we still see significant downside in Ballard's stock price due to the same worries expressed in the previous report. First off, the company still has an extremely expensive relative valuation even though it has fallen over 40% in price. This is illustrated in the analytical table below, which ranks Ballard on five important valuation metrics relative to the market. Some may question using the market as a relative benchmark, but it's crucial to do so to avoid industry group bias. That bias can result in justifying the valuation of an expensive stock based on the frothiness of its peer competitors.
