The hydrogen machine

If history doesn’t repeat itself, then it certainly can rhyme. Remember one of the ‘stories’ of 2020? Hydrogen was, apparently, going to change the world, ushering in an era where environmentally friendly vehicles would soon be gliding around our streets. Meanwhile, factories would also be running on hydrogen, minimising their emissions. Investors who bought into the narrative would have done rather well that year. Most stocks exposed to the theme rose well over 100% (Plug Power increased by 973% – yes, you did read that correctly – in 2020). Now, however, the average hydrogen play has lost between 70% and 80% of its value from its peak. What lessons can be learned from all this?

Have no doubt, the potential embedded with hydrogen as an alternative energy source is significant. The challenge is the cost and speed at which the industry can scale. We first discussed this topic three years ago. The same dynamics remain at work currently. One recent report shows that to get to a net-zero world might require 500m tonnes of hydrogen annually. To do so, however, would require $20tr of cumulative investment by 2050. At present, less than 0.5% of this sum has been invested.

We recently had the opportunity to participate in a virtual conference where several senior executives from the hydrogen industry presented. The CFO of a European-listed play in the space – whose shares have more than halved from their peak – began by describing his firm as “a technology company.” This always rings some alarm bells for us. Later in the discussion, he elaborated by noting that “we don’t need new technology.” Rather, the challenge is “developing it at scale.” We heard a similar message from a US-listed business (whose shares have fallen by more than 70% from their recent high). “Execution” was cited as the biggest challenge. It’s fair to identify the problems; harder to come up with solutions. If the experience of other alternative energy sources is any template, then it may take some years for the industry to scale fully.

A second crucial lesson that can be drawn from the reversal of (share price) fortunes in the hydrogen space is to consider its implications when it comes to investing in listed AI businesses. We have regularly made the observation in our Blogs that it is crucial to separate hype from reality. Based on how almost every CEO in any industry feels the need to mention AI-related expenditure on its earnings call – references are up 85% year-on-year to an all-time high, per Bank of America Merrill Lynch research – we may be at peak AI mania. If the hydrogen hangover is anything to go by (not to mention what happened when the TMT bubble burst), then it may pay to be wary.

13 June 2023

The above does not constitute investment advice and is the sole opinion of the author at the time of publication. Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise.

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Alex Gunz, Fund Manager

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