Plug Power Earnings Raise Profitability Concerns Going Forward

Plug Power Earnings Raise Profitability Concerns Going Forward - Carbon Herald

Plug Power (NASDAQ:PLUG) – a major hydrogen fuel cell technology company and a leading hydrogen infrastructure builder, has reported its Q2 earnings results on August 5th. The company’s revenue results outperformed the projections and showed a steady rise. However, the Plug Power earnings report revealed profits and positive cash flow continue to disappoint which raised some concerns moving forward. 

Taking a look at fundamentals, Plug Power’s long-term positive outlook is still valid. The company is working hard to disrupt the global power market by providing green hydrogen as a clean alternative fuel to markets around the world. It hasn’t reached profitability ever for its 21 years of existence, but the future seems bright as the world is transitioning towards alternative clean energy sources. 

And Plug is counting on green hydrogen – even though the fuel has been under-researched historically, it provides an amazing opportunity to help the world eliminate fossil fuel burning.  

Q2 Power Plug Earnings Call Overview

Plug Power Q2 earnings results showed a mixed picture and justified both bullish and bearish views about the long-term future of the hydrogen fuel cell company. Plug power stock was volatile after the release, the shares jumped from a low of $25.60 to $30.25 or more than 18%, only to fall back to $25 after a couple of days where they currently trade at. 

Plug reported net revenue of $124.6 million for the quarter, exceeding analysts’ expectations of $114 million, and the company’s forecast of $115 to $120 million. The CEO Andy Marsh also raised the company’s gross billings forecast to $500 million from the previous forecast of $475 million for 2021. 

Another positive Plug Power news that might have made investors pick up shares is the YoY increase of the GenDrive fuel cell product that can power vehicles for example. The company shipped 3,666 units which is an increase of 37% year over year. It also deployed 16 hydrogen infrastructure systems, as opposed to 4 during the same period last year.

While revenue increase is certainly impressive, earnings per share disappointed – they reached a negative $0.18 – much lower than the -$0.03 EPS analysts have predicted. Plug Power also reported a negative cash flow of $129.5 million for Q2 which amounts to $246.6 million in total for the first half of 2021. For comparison, the company reported -$112 million cash flow for Q1 and Q2 combined in 2020. 

Downward Momentum For Plug Power

Despite impressively growing revenue, the company continues to report a loss and burn through its cash flow which raises concerns about the management’s ability to deliver profitability as promised. The CEO projections call for a break-even of service margins in early 2022 and continued progress through 2024 for margin targets. 

Analysts expect profitability to happen within the next few years. The fact is that break-even has been consistently elusive and I think this is the major reason why the Plug Power stock price has been under a hood and has failed to move beyond $30 in the past couple of months. The stock price also couldn’t keep January highs at $75 on the hype of Biden’s ambitious infrastructure spending plans. 

In fact, the stock couldn’t enjoy the rally it previously did on government investments news. The Senate approval of the $1 trillion infrastructure bill announced on August 9th boosted the shares slightly and it was pretty short-lived. 

Despite the mere reaction, the infrastructure bill, if passed by the House, is positive news for the stock price as at least $8 billion in funding is dedicated for various fuel cell technologies. However, $15 billion is also set aside for electric vehicles which would boost their already prevailing expansion over hydrogen infrastructure. 

As even the infrastructure bill being passed didn’t fuel investors’ interest, we are left with not much to justify a Plug Power stock rally for the rest of 2021 and one might argue it will continue to lose momentum. What is left to hope for is profits but they don’t seem to come around soon if history is any indication. 

Bullish Forecast

The $1 trillion infrastructure bill still doesn’t go far enough to support the hydrogen economy or clean energy in general. The potential approval of the even bigger government spending of $3.5 trillion for the fiscal 2022 year could provide a bigger boost for the hydrogen sector as it involves a more ambitious package of investments intended to address climate change and make the US carbon neutral by 2050. 

The company reported Q2 operating expenses of $49 million which represent a jaw-dropping 86% increase year-over-year. However, $35 million of spending was due to force majeure events with one of its hydrogen suppliers which is not expected to be a recurring problem for the future. 

Furthermore, Plug Power has piled up $3.2 billion in cash and cash equivalents which means the risk of liquidity or solvency is negligible. The only major concern remains Plug’s ability to generate cash organically which is certainly a smart reason to hold buying this stock. 

With those fundamentals in mind, the long-term Plug Power forecast stays bullish but returns in the short to medium term are not that optimistic. For patient investors, current lows may actually represent a buying opportunity. 

If many things go right, the shares could also touch the $40-$50 resistance area by the end of the year and throughout the beginning of 2022 based on growth on clean energy projects, customers, and more partnerships. That could lead to a revenue increase and hopefully, better cost management. 

Technical Analysis

Looking at the Plug Power chart, I see that the inverse head and shoulders pattern formed at the end of June fell through. The price moves in a downward trajectory right now. The downward trend will confirm if the stock keeps failing to break above $30. 

A potential run above $35 would signal trend reversal and an attempt to challenge the $50 resistance area. An unsuccessful breach could exhaust bulls and I expect another pullback towards $30 – $35. 

The Plug Power stock forecast 2021 shows if any positive news about profitability, new partnerships, or more infrastructure spending towards the hydrogen sector come out, backing up the overly positive picture painted out by the management, the price could see a boost above $35 towards $50 resistance. 

Any force majeure events that could put cost pressure on the fragile cash flow statement, could prevent the green hydrogen stock from moving above $35 and could even see it targeting further lows below $20. 

Conclusion 

Taking into account the latest quarterly results confirming decreasing profits and fast continuation of revenue, I am concerned that increased net revenue does not translate into healthier profit margins. In fact, EPS are much below expectations which makes investors think whether this trend would be true for the rest of 2021 and next year. 

Even though the green hydrogen company forecasts $722 million in revenue in 2022 and a consistent increase after that, will costs continue to increase exponentially to outpace revenues? It all comes down to management’s ability to negotiate much more favorable terms with customers like Amazon and better cost control.

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