Should You Buy Fervo Energy While It's Below $30?
Key Points
Fervo Energy was a hot initial public offering this past May, but then the stock fell sharply.
The company's enhanced geothermal systems could be a solution to the growing need for energy.
Google just signed a 396-megawatt deal, the largest agreement for enhanced geothermal power on record.
Fervo Energy (NASDAQ: FRVO) launched with its initial public offering in May and shot out of the gate like gangbusters. Fervo priced its IPO at $27, but opened closer to $35 after the offering was upsized due to strong demand. The company raised $2.2 billion, and shares quickly topped the $40 mark.
It's been a struggle ever since. Fervo stock fell steadily after that upsized offering, dipping all the way to $15 before it received a huge catalyst on Sept. 1 -- the announcement that it had signed a power purchase agreement with Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) for 396 megawatts of carbon-free electricity to operate a data center in Utah. It's the largest agreement for enhanced geothermal power on record.
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Shares of Fervo stock jumped 25% on Sept. 1 to nearly $20. With analyst sentiment high, electricity demand increasing, and Fervo holding more than 50 gigawatts of development in its pipeline, shares may be sharply undervalued right now.
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A look at the Fervo-Alphabet deal
According to a company news release, Fervo's agreement with Alphabet's Google involves the company's under-construction Cape Station plant. While part of the plant is expected to be operational at the end of this year, the Google agreement involves the plant's enhanced geothermal systems GeoCluster, which is expected to come online in 2028. Alphabet will also have the option to expand the agreement by about 600 megawatts, bringing total capacity to 1 gigawatt by June 2030.
"This agreement reinforces that EGS (enhanced geothermal systems) is ready to power the next generation of computing infrastructure," Fervo CEO Tim Latimer said. "As demand for reliable electricity grows, customers like Google need energy resources that can be deployed at scale, operate around the clock, and deliver where power is needed."
Geothermal power plants tap into heat from beneath the Earth's surface to generate electricity. By drilling down into naturally occurring underground reservoirs of hot water or steam, plants can pump the water up to the surface and use the heat to drive turbines and generate electricity. Water can also be pumped back down to reheat, providing a consistent power source.
The problem with geothermal energy is that the technology is limited to geographic areas with large underground reservoirs. Enhanced geothermal systems solve this issue by drilling horizontally to access multiple wells from a single spot.
Fervo only had $113,000 in revenue in the second quarter -- its first as a publicly traded company -- but deals such as the one with Google bode well for the company's future. Fervo plans to develop 1.1 gigawatts of power by 2030 and has increased its power forecast by 100 megawatts in its most recent update. It currently has a backlog of more than $7 billion.
Eleven of 12 analysts surveyed by Yahoo! Finance have "Buy" ratings on Fervo stock, with a consensus price target of nearly $43, indicating potential upside of 118%. I think Fervo is a strong buy at less than $30 for any investor looking for a company at the intersection of artificial intelligence and power generation.
Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.