Ocean Power Technologies (OPTT): rising oil prices may trigger a request for advice
We wrote about Ocean Power Technologies, Inc. (OPTT) in October last year when we said the company still had significant growth potential. Despite the glaring lack of financial growth to date, companies that invest in power generation products (which are essentially carbon-free PowerBuoys) from renewable ocean energy will continue to be supported as long as progress will be made. Since the majority of this planet is water, there are tremendous opportunities for maritime solutions in sectors such as offshore wind, offshore oil and gas, and offshore defense to name a few- one. Suffice it to say, if enough value is added, you’d think many customers would be very interested here.
If we pull up a chart of Ocean Power Technologies, we can see that we at least seem to have a short-term bottom in the stock. From the January lows of this year, stocks tested their 200-day moving average this week, but didn’t have enough momentum to break through that resistance level. Long-term investors, however, will have been encouraged by the stock’s recent tape action. Stocks were able to exit their 50-day moving average with relative ease and we expect buyers to enter in droves if indeed the 200-day resistance level can be convincingly removed on the next attempt.
Since investors have very little to do in this game regarding a viable and functioning business, we reiterated in the previous commentary to watch the technicals to spot a change in the fundamentals of the stock. Despite the fact, for example, that sales in the most recent second quarter more than doubled to $247,000, OPTT is still far from profitable. Additionally, second quarter revenue was actually a sequential decline from the first quarter and higher operating costs in the third quarter resulted in a negative profit impression of $5.2 million for the quarter. .
Considering these types of trends where the loss of net profit continues to be many multiples of what the business generates in terms of sales, it’s no surprise to see that over $240 million in losses were borne by the investors at this stage. When management was pressed during the last quarterly conference call about the company’s focus on profitability, the CEO once again directed listeners to the data service segment where recurring revenue is supposed to be the order of the day once enough buoys are launched. To that effect, the company recently appointed a new CFO to work in this area due to his experience with subscription models.
Regarding recent developments, the CEO highlighted the encouraging trend of the company’s strategic advisory service, the evolution of OPTT’s maritime domain awareness solution and the recent acquisition of accreditation which is Advanced Marine Robotics. Probably the most immediate element here that can favorably affect sales figures in the third quarter and beyond is the reservation of several offshore engineering projects. The price of crude oil, for example, has nearly doubled since last December’s third quarter earnings report, so we expect to see higher demand in the third quarter from energy explorers & producers.
The valuation of Ocean Power Technologies is where things get interesting. Value investors, for example, would say that any company with a sales multiple close to 50 is not a value game. How should we interpret this? Bullish investors will say that the company’s current market cap of over $83 million and multiple skyrocketing selloffs indicate the coin’s huge potential. While that may be true, the company’s valuation will continue to hold value investors at bay. The reason for this is that there are basically two engines of profit. One being sales and the other assets. Given the company’s rising costs, sales currently lacks the ability to drive earnings forward significantly in the near term.
Also, on the asset side, OPTT’s current assets are mostly cash plus a small portion of property, plant and equipment. Although the shares trade very close to their book value, this comes at a cost, with the number of shares outstanding now exceeding 55 million. Similar to inflation, which is currently plaguing the world, these additional shares mean that the total amount of shares outstanding at this point is worth less than before. Additionally, with about an additional approximately $5 million of operating cash flow used in the third quarter, that $73 million cash balance is destined to continue to decline until fundamentals can change here in a way significant.
Timing a potential long entry
Since investors do not have forward-looking projections to work from, investors must continue to base their assessments on technicalities and recent developments within the company and industry. Regarding the technical aspects, we reiterate our position regarding the expectation of the removal of the 200-day moving average. Moreover, a drop in short-term interest rates (currently around the 4% mark), as well as some decent insider buying, would certainly boost the confidence of impatient shareholders.
Therefore, to sum up, technically lately we have certainly seen improvements in Ocean Power Technologies. Despite the poor financial results and lack of forward guidance, we will continue to monitor technical data as we believe the chart remains the best reading on this company’s fundamentals. We look forward to continued coverage.