Ballard Looks to Show Continued Order Growth in 2023

We have lowered our fair value estimate for no-moat Ballard Power Systems BLDP to $6/CAD 8 per share from $7.50/CAD 10 following fourth-quarter results. The drivers of our lower valuation are a moderation in our long-term revenue ramp-up and a slight reduction in terminal gross margins. We see the shares as slightly undervalued in light of our Very High Morningstar Uncertainty Rating.

Ballard’s full-year 2022 revenue declined 20% year on year, driven by sharply lower China revenue and lower technology solutions revenue. Given the early stage of revenue generation, we are more focused on signs of commercial progress than near-term financial results. On this metric, results were more positive, with the order backlog ending the year at $133 million, up from $93 million a year ago despite similar headwinds from China and technology solutions. Gross margin was negative 16% for the full year due to a lack of economies of scale and a commercial focus on securing initial platform wins.

We have moderated our revenue forecast over the medium term largely to reflect lower China orders. The company remains positive on China long-term but expects it to account for a lower share of orders than prior assumptions. We’ve also tweaked our terminal-year gross margin assumption to 30% from 32%. Management continues to expect an inflection point in 2024-25 for revenue and gross margin.

Ballard expects 2023 operating expenses of $145 million (midpoint), flat year on year, as it seeks to limit ongoing cash burn. The balance sheet remains relatively sound with nearly $1 billion of cash and investments at year-end, but the company’s long-dated revenue scaling (2025 and beyond) places an emphasis on minimizing cash burn over the coming years.