Investor appetite in the coming hydrogen economy is growing “more discriminating” as investors try to pick winners and avoid losers, much like what happened in the internet frenzy of the early 2000s, according to James West, senior managing director at investment advisory firm Evercore ISI.

But that appetite is still strong and the general interest from investors in green hydrogen is “enormous,” West said during the U.S. Department of Energy’s Hydrogen Shot Summit on Tuesday.

In the growing hydrogen market frenzy, West sees involvement with green hydrogen as a “critical success factor” for companies.

“We think that companies must be involved with green rather than gray hydrogen and minimal blue hydrogen, as this is where the market’s going to be the strongest,” he said. Companies also must focus on “products or industries where green hydrogen is the key viable alternative to fossil fuels.”

If green hydrogen producers can be cost-competitive, he added, they have a “massive opportunity” to compete in the industrial sector where gray hydrogen is in use already.

The types of customers and partnerships that hydrogen companies secure also will make a difference in their ability to succeed in the near term.

“We believe the scaling of this industry is going to take an all-hands-on-deck approach to meet deep decarbonization goals,” West said.

Hydrogen solutions provider Plug Power’s (NASDAQ:PLUG) joint venture with Renault, he said, is a good example of the kind of partnerships that the industry needs. HYVIA, announced in June, will focus on development of light commercial fuel cell vehicles, hydrogen charging stations and green hydrogen supply. Plug also will finalize a joint venture soon with SK Group to build out Korea’s hydrogen economy.

Plug has successful customers, and “that helps,” West said. The company has contracts with Amazon and Walmart to put its fuel cells in their warehouse lift trucks.

Other notable industry partnerships, West said, include Cummins’ (NYSE:CMI) memorandum of understanding with Chevron (NYSE:CVX), and Blum Energy’s (NYSE:BE) technology arrangement with Baker Hughes.

Cummins and Chevron announced in July that they will collaborate in the areas of hydrogen vehicle and infrastructure development and using electrolyzer and fuel cell technologies in Chevron’s refineries. Baker is looking to combine its gas turbine technology with Blum’s solid-oxide fuel cell technology.

Valuation

As investors try to sort out how to value hydrogen-related companies, they are turning to methods used for technology and software companies over traditional metrics, such as price-to-earnings or cash-flow yields.

“While the investor market uses those traditional metrics for mature industries, such as oil and gas, the hydrogen market is so nascent and rapidly growing, and therefore investors want to put very high price-to-sales [P/S] multiples in the shares of hydrogen-focused companies,” West said.

The P/S ratio will help investors understand how financial markets value a company’s revenue per dollar.

“Investors are also looking at metrics such as enterprise value-to-sales or enterprise value-to-total addressable market,” West said. Those metrics will show investors how a company is valued based on its sales, equity and debit.

The investor market for clean technologies is moving out of what West calls the “green hysteria of the post-election period,” resulting in a reallocation of “capital to companies with established customers, backbones and products.”

This year, he said, hydrogen-focused stocks have fallen by about 60% from their peak in the first quarter to the end of August. The broader group of clean energy stocks, which includes established hydrogen companies, fell about 25% in the same period.

Credit Ratings

With a sound framework for project finance still largely out of reach for hydrogen companies, they need creative ways to structure projects to achieve an investment-grade rating, according to Andrew Joynt, senior director at Fitch Ratings.

The ideal scenario to finance a project, he said, is an established technology operating with a long-term revenue agreement with fixed volume and pricing to create a stable cash flow profile.

Hydrogen technologies, however, often are supporting projects that tap into new markets, so near-term stability isn’t there.

“It’s going to be an uphill climb to get rating agencies … completely comfortable with taking a long-term view on some of these projects,” Joynt said during the summit.

Less well established companies, he added, will need to rely on independent experts to support the operating assumptions of new projects and technologies. And companies can look for ways to shift project risks to third parties.

“You can shift some of the risks to a manufacturer by getting a long-term, strong warranty or an operator who will provide a performance guarantee on the level of performance of a project itself,” Joynt said.

It’s harder, however, to shift risk on the revenue side.

Some project structures overcome that barrier by issuing shorter term debt. Those are “shorter-term loans that have some refinancing risk but allow you to right-size the debit as the market starts to evolve,” Joynt said.

While alternative finance structures can move the needle on project finance, they will come at a cost.

“Hydrogen companies that are going for financing are going to be faced with some choices of how much they want to try to lower the cost of debt, knowing that it may come at a lower rate of return,” he said. That tradeoff, he said, could be worth it for a company looking to establish its first project on the path to commercialization.