Ceres Power (LSE:CWR), the FTSE 250 developer of solid oxide fuel cells, wants to do things differently to many other manufacturing companies on the index.
Instead of building expensive factories and employing large numbers of staff, it plans to license its technology to third parties to incorporate the cells into their own products. In return, Ceres Power will earn a royalty from each.
But will this strategy work? Could this approach help it become a top passive income stock? Let’s explore.
How much?
A recent earnings call revealed that the group’s looking to earn $50m-$100m per GW of partner manufacturing capacity.
UBS reckons the group could achieve 1.8GW by 2030, generating at least £100m of royalties a year. With few associated costs, much of this would flow directly to Ceres Power’s bottom line. The broker has a 12-month price target of 970p.
The company says its total addressable market is 22GW. And with data centres crying out for cheap power, the group’s products could be the perfect solution. However, due to their speed of deployment, efficiency, and green energy characteristics, fuel cells could be used in lots of non-AI applications.
But there’s a long way to go before it reaches anything close to these figures. For the first six months of 2026, it earned royalties of £181,000. The bulk of its revenue came from development work.
Not for everyone
However, I believe investing in the group carries above-average risk, not least because fuel cells have yet to be widely adopted.
Indeed, as long as it remains loss-making, there’s always a chance that it will ask shareholders for more money. It did this in June when it raised £103m at 570p a share.
And currently (4 November), it’s the UK’s most-shorted stock with over 18% of its shares out on loan. Eventually, these positions will have to be reversed. But for the time being at least, they have driven the group’s share price down.
Significantly, the company say it’s confident that it will be in a position to announce a new partner before the end of the year. If it does, this could be the news that prompts the shorters to buy the stock they need to fulfil their contractual obligations.
As for the company itself, there’s a risk that its valuable intellectual property could be stolen. Having been founded in 2001, it’s spent hundreds of millions on product development.
Final thoughts
In my opinion, it’s a stock that could be considered by investors who are prepared to inject a bit more risk into their portfolios. Partly due to the interest of the short-sellers, the stock’s nearly three times as volatile as the FTSE 250.
However, if the group’s partners can find customers for Ceres Power’s fuel cells in sufficient volumes, it could establish itself as a cash machine thanks to its potentially high-margin reliable income stream.
In these circumstances, there will be little for the company to do with its surplus cash other than pay a large dividend. Cleverly, the group would then be in a position to use one passive income stream (royalties) to pay another (dividends).
But for those who are more cautious, there are lots of other stocks available today…
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James Beard owns shares in Ceres Power.
This story originally appeared on Motley Fool
