Fluence Energy has gotten torched over the last six months - since October 2024, its stock price has dropped 78.8% to $4.39 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

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Even though the stock has become cheaper, we're swiping left on Fluence Energy for now. Here are three reasons why we avoid FLNC and a stock we'd rather own.

Why Is Fluence Energy Not Exciting?

Pioneering the use of lithium-ion batteries for grid storage, Fluence (NASDAQ:FLNC) helps store renewable energy sources with battery systems.

1. Low Gross Margin Reveals Weak Structural Profitability

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Fluence Energy has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 6.2% gross margin over the last five years. That means Fluence Energy paid its suppliers a lot of money ($93.84 for every $100 in revenue) to run its business.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Fluence Energy’s margin dropped by 5.2 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because it is already burning cash. If the trend continues, it could signal it’s becoming a more capital-intensive business. Fluence Energy’s free cash flow margin for the trailing 12 months was negative 6.8%.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Fluence Energy burned through $172.5 million of cash over the last year. With $631.7 million of cash on its balance sheet, the company has around 44 months of runway left (assuming its $392.1 million of debt isn’t due right away).