Bloom Energy Trades at 140 Times Earnings. Here’s the Growth Rate It Needs to Justify That.

The artificial intelligence (AI) spending spree among giant technology companies has changed the trajectory of Bloom Energy‘s (BE -8.61%) business. With sales of its hydrogen fuel cells booming, the company’s earnings are starting to catch up to its lofty stock price. In fact, if the company’s earnings doubled, its price-to-earnings ratio would be in line with the technology sector average of around 32x.

Given recent financial performance, doubling earnings is a very real possibility. But there’s another way for Bloom Energy’s P/E to fall from its current 140x, as of this writing, to 30x. Here’s what you need to know.

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Bloom Energy’s P/E plunges after earnings

If you chart Bloom Energy’s P/E ratio, it plunged in October. There were two pieces to that drop. First, the stock price declined. And then the company reported third-quarter earnings. Both played a major role in the trailing P/E going from over 350x to roughly 140x.

The most exciting part of the story, however, is earnings. In the third quarter, the company’s revenues rose 138% year over year. The biggest driver was the 179% increase in revenues from the sale of fuel cells. The company’s fuel cells can provide off-grid power, allowing artificial intelligence data centers to bypass the local utility and come online more quickly. The huge sales increase pushed adjusted quarterly earnings to $0.94 per share, up $0.78 from a year earlier.

BE data by YCharts

That’s a big change for trailing 12-month earnings, since a smaller adjusted profit dropped off and a much larger profit was added. But there’s another important story here: the company’s adjusted earnings have increased from $0.45 per share four quarters ago to $0.94 per share, more than a 100% increase over the past 12 months.

How much more growth is needed to justify Bloom’s P/E?

The interesting thing is that Bloom Energy simply sustaining its third-quarter earnings would reduce the P/E ratio to 60x. That’s still an expensive price tag, but far more reasonable than the 350x P/E not too long ago. And if earnings double again, the P/E would drop to 30x, which is actually a touch lower than the average technology stock. If earnings continue to grow at the current rate, Bloom Energy will justify its P/E ratio.

But there’s a small wrinkle here, and it goes back to the P/E graph above. Bloom Energy’s P/E ratio would also decline if the stock price dropped, as it did at the start of October. So if earnings remained the same, but the stock price was cut in half, the P/E would also fall to 30x. The P/E ratio has two components, and each one plays an important role.

Will Bloom Energy’s earnings rise or will its stock fall?

The fact is, Bloom Energy has been caught up in the AI trade, which many fear has turned into a bubble. Investors are increasingly scrutinizing tech stocks and their AI spending, leading to big declines in some stocks. So the P/E falling to a more reasonable level could quite possibly result from continued strong earnings and a share price decline.

While Bloom Energy’s product, which allows AI companies to bypass utilities, is likely to remain a key selling point, the stock also remains a high-risk investment. Earnings could continue to rise, perhaps even doubling over the next year or two. That would justify today’s current share price. But if the enthusiasm for the AI trade wears thin, the P/E could just as easily fall in a less desirable way.