I believe renewable energy is the next great growth sector and early investors still have a chance to get in on the ground floor. It can be hard to know which companies will perform well in the future, but I believe AFC Energy (LSE: AFC), based in the UK, has what it takes to become the cornerstone of a new hydrogen economy.

Challenges in renewable energy

Renewable energy is a functional technology, but it is still in need of some development. If we are to achieve a sustainable net-zero goal, we must overcome several obstacles.

Intermittency and energy loss are the two most significant of those obstacles. Wind and solar energy are plentiful and clean, but they are intermittent. We can’t rely on them to provide all of our electricity 24 hours a day, seven days a week. Electricity also loses energy as it travels further, which is why solar panels in the Sahara can’t easily power homes in London.

AFC’s competitive edge

What we need, in my opinion, is a fuel that is energy-dense, transportable, and created from renewable resources. That fuel, I believe, is hydrogen. I also think that AFC Energy could pave the way for its adoption.

AFC specialises in building the fuel cells required to make hydrogen fuel work.

Its competitive edge comes from a patent it has on ‘alkaline fuel cells.’ These fuel cells operate with lower purity hydrogen fuel. Producing hydrogen fuel is currently costly and complex, especially at the purity levels necessary for fuel cell operation. Vehicles that employ alkaline fuel cells will be able to be run at a much lower cost, making them a no-brainer purchase for consumers and businesses alike.

Company fundamentals

2021 was an eventful year for the business. AFC Energy raised income, boosted orders, and produced several new products in 2021. The stock trades at 33.30p, which is a decent price given the company’s size.

However, throughout 2021, the value of the stock dropped 60%, which perplexed me at first. AFC is currently debt-free, and revenues are expected to increase by 100% this year.

In November 2020, the share price soared £350% when AFC announced it had shared its alkaline technology with its research partners. I believe that this vote of confidence in the technology generated a lot of investor excitement, which pushed the share price far beyond its fair value. The slow bleed over last year was just a market correction.

My main concerns

I have some reservations regarding AFC. While revenues are up, profits are down. The firm is growing its operations and reinvesting in itself, but profits still aren’t expected for several years. It’s a high-risk bet predicated on whether hydrogen fuel becomes widely adopted.

But progress is being made in this regard. AFC recently inked a £4m contract with ABB, a Swiss electrical business, for a high-power electric car-charging application, while JCB just made a £1 billion order for hydrogen from Australia.

Every day, the number of applications for hydrogen fuel expands, from industrial machines to high-energy production to something as basic as bringing energy to the developing world. In the next years, any of these markets have the potential for tremendous growth. Alkaline fuel cells from AFC have the potential to reduce expenses for anybody who uses them. It offers a significant competitive edge, making it a worthwhile inclusion to my portfolio.

The post Diamond in the rough? This UK company could dominate renewable energy appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.