What are the best hydrogen stocks for UK traders to watch?

Top 3 hydrogen stocks

The best hydrogen stocks in the UK are those stocks which offer direct access to the hydrogen market. There are three dedicated hydrogen technology stocks on the Alternative Investment Market (AIM), which houses smaller-capped companies with growth potential. The stocks are:

1) AFC Energy (LON: AFC)

AFC Energy is a leading provider of alkaline fuel cell systems, used in everything from electric vehicles to space shuttles. AFC is currently planning to expand its Surrey manufacturing plant to meet growing demand for its product.

In July 2020, shortly after the pandemic began, it saw an oversubscribed fundraiser of £31.6 million to support its growth, sending its share price spiking to 83.5p by January 2021.

However, it’s since fallen to 26.5p, as investors reassess its long-term prospects. In recent interim results, it generated revenue of just £276,000. While this represented an 85% increase over the same period last year, this is a company with a £195 million market cap. And with monetary policy tightening, growth is becoming harder to achieve.

Moreover, its losses jumped by 135% in H1 to a whopping £7.8 million. And this debt will only become more expensive to service.

But AFC is growing its customer base, winning its first commercial order, worth £4 million, for its S Series liquid cooled fuel cell system from market titan and strategic partner ABB. And it’s leasing systems to a variety of clients elsewhere.

While it has £49 million of cash, its high cash burn rate means there is a risk it could issue more shares, as is has done in the past, on the way to profitability.

2) Ceres Power (LON: CWR)

Ceres Power is an innovator in solid oxide fuel manufacturing, a novel, inexpensive, low energy method of manufacturing hydrogen. It’s partnered with a number of international brands to secure funding and distribution channels while it attempts to scale up.

At 596p per share, the hydrogen stock is down by almost two thirds since its record in February 2021. However, its fuel cells represent an area of immense potential, especially given its partnerships with Bosch and Doosan Fuel Cell. It’s also teamed up with Shell to deliver a megawatt-scale solid oxide electrolyser demonstrator to power R&D facilities in India.

Unlike AFC, Ceres has no debt. But it does have significantly more capital, with £221 million in cash at the end of June. And burning only £32 million over the past 12 months, its cash pile would last more than six years at current rates, meaning a capital raise is unlikely.

However, the investment case isn’t simple. It generated only £10 million of revenue in H1 2022, declining from £17.4 million in the same half last year. While it blames the fall on ongoing negotiations with its clients that would eventually deliver significant revenue, this is not yet guaranteed.

Ceres’ key advantage is that its fuel cells can be used with both traditional hydrocarbon energy sources as well as hydrogen. This means its clients can slowly transition to hydrogen, representing a smaller corporate investment risk.

CEO Phil Caldwell thinks ‘short-term revenues are dependent on the timing of significant licensing deals. Our focus remains on building long-term value through scaling the manufacturing capacity for our technology and growing the recurring, annual royalty streams we will receive as partners succeed.’

3) ITM Power (LON: ITM)

ITM Power is a producer of electrolysers — low-carbon hydrogen gas generation based on proton exchange membrane technology. As one of the few companies in the green hydrogen space, ITM’s future prospects could be bright.

The company is currently building its second Gigafactory in Sheffield and is planning a third abroad. But at 212p per share, it’s also fallen significantly since its 682p record high in January 2021, highlighting the wider effects of tighter monetary policy.

However, it’s not just the events outside of ITM’s control: in 2021, it made sales of just £4.3 million, making a loss of £28 million. And in H1 2022, it made £4.2 million in revenue, highlighting the potential exponential growth. But for context, this is a company that still has a £1.26 billion market cap.

It’s likely that hydrogen power — and in particular, green hydrogen — will become a significant source of energy as the green revolution accelerates, particularly given the political prominence of energy security. And as there is a dearth of UK-based hydrogen stocks on the market, ITM Power could be an excellent, though risky, early investment.

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