Plug Power (NASDAQ:PLUG) is one of the biggest fuel cell technology companies in the world and the stock certainly provides some promising future growth opportunities. They are mainly based on the hype around hydrogen becoming one of the major energy resources in the net zero future by 2050. However, many investors distrust management. The past and future financial performance of the company also hide risks, so a conservative approach might not be a bad idea when considering Plug Power stock.
The hydrogen fuel cell stocks are attracting attention recently as the world is transitioning to low carbon technologies. More and more investments are poured into green initiatives serving hard to decarbonize industries like aviation, shipping, trucking, utility and pretty much every energy and transport sector. Hydrogen offers the unique opportunity to provide reliable, zero emissions energy to those sectors. There are hydrogen fuel cell systems for cars, forklifts, trucks, and under development are zero emissions hydrogen airplanes and marine vessels.
Hydrogen Market Potential
The hydrogen market has many places to expand and some projections call it to be a $10 trillion market by 2050. The hydrogen fuel cell technology is also on the rise, especially in America where the Biden administration has released a $2.25 trillion plan. The plan sets aside billions of investments in projects for climate change mitigation, including hydrogen and utility-scale energy storage. In fact, the push of the new administration towards clean energy and ambitious decarbonization targets is the reason why the stock soared at the beginning of the year.
It reached $75.49 in January 2021 and marked a 326% jump from its December 2020 low. The investors were excited by the Plug Power news as the Biden/Harris website cites hydrogen and battery technology amongst the areas of investment that the infrastructure plan will reach. It also gained 950% in 2020 which is an incredible performance. However, since January, the Plug Power stock price has been pretty much one the downside – trading currently around $29.60, reaching a bottom of $18.60 earlier in May.
Right now it doesn’t seem to offer high enough value to be a compelling buy, especially after reporting accounting mistakes in its financial statements dating back since 2018. Plug had to adjust some R&D costs under costs of revenue, which does lower its gross margin. The adjustments actually raised the company’s net revenue over the past three years by $6.5 million, but EPS fell by 13 cents. The company explained the mistake by the internal financial reporting unit not being trained adequately to deal with a company growing so rapidly in the renewable energy market.
All in all, the market sentiment is that the wrongdoings in its financial reporting does not change the long-term view of the company. It does raise some questions though about whether the management is prepared to handle its rapid growth. The Plug Power stock analysis points that the company is pursuing an aggressive agenda to bring multiple business units online, heading the commercialization of hydrogen power. The company is pushing its three business segments simultaneously. They include materials handling, hydrogen power infrastructure and modular arrays for stationary power.
The materials handling unit is the Plug Power’s hydrogen fuel cell tech used in forklifts. This is currently its core business, and is projected to reach $750 million in annual sales in 2024 as said by the company. However, the bigger part of this revenue comes from 2-3 clients – Amazon, Walmart and Home Depot which can be translated into potential sales revenue risks if future relationships to some of them change.
The company is also investing heavily across the US in building hydrogen fueling stations infrastructure much like Tesla style. The infrastructure aims to support the future development of the hydrogen economy but it’s also hanging over and burning through its cash flow. The fuel cell company has also been officially invited to submit a Part II Application for a $520 million loan from the Department of Energy to build the 500-ton green hydrogen network by 2025 that it has planned in its agenda.
Plug Power Stock News And Risks
The aggressive expansion plan the company had set out brings great risks. The management has raised the 2024 sales target to $1.7B which is an increase of more than 40% compared to the previous forecast. The company’s target for adjusted EBITDA works out to $354 million and operating income to $283 million. In 2020, the company reported negative revenue of around $93 million and has never actually reached profitability in its 21 years of existence.
It has never also had a positive EBITDA either. It is worth mentioning that the margin for “sales of fuel cell systems and related infrastructure”, which accounted in 2019 for around two thirds of revenues, was largely unchanged, going from 35.4% to 34.7%. Now the company raises projections for 2024 by a whopping 40% which is a serious statement. Many investors get nervous by the huge overpromise for growth for a short period of time like 3-4 years. Even though profitability is expected to happen in the next few years, it is doubted that it will be in line with the projected figures by the company.
A setback towards profitability can also be seen in Plug Power agreements with Amazon and Walmart. Plug is offering stocks for every $50 million bought in fuel cells. That has created very favourable contracts for those clients but Plug Power is losing money servicing this technology. However, with the expiry of contracts around next year, it has the opportunity to negotiate better deals.
Partnerships Justify Growth Potential
What might justify the ambitious revenue and growth projections of management are the recent expansion partnerships Plug has formed, pointing out for the hydrogen market to succeed. Plug announced a joint venture with Acciona – a global leading supplier of sustainable infrastructure solutions – for the development and maintenance of green hydrogen projects. They will service the growing demand in Portugal and Spain and their goal is to take 20% of the green hydrogen market by 2030 in the region. Plug will serve as a supplier of electrolyzer technology to the joint venture.
Plug is taking over the Asian market as well. SK Group – a leading South Korea business group has invested $1.5 billion in the company, taking 9.9% stake which boosted Plug Power forecast. The partnership intends to provide hydrogen fuel cell systems, hydrogen fueling stations, and electrolyzers to the Korean and broader Asian markets. The Korean government is also backing the hydrogen transition, saying it will be a $40 billion market by 2024 which means Plug might be getting hands on government funding not just by American democrats.
The Plug Power stock seems like a risky investment due to concerns around management’s ability to deliver its profitability projection targets and market uncertainties. However, it also does represent a lot of opportunities. Being one of the biggest hydrogen fuel cell companies in the world it is well-positioned to ride the wave of hydrogen market growth and take a big piece out of it.
With the help of the government and breakthroughs in battery tech that can cut costs, hydrogen can become commonplace in the economy. With the stock dropping massively in the past three months, it does seem like a good entry point for a patient and risk-averse investor.