Plug Power Inc. (PLUG) inked a deal with a wireless company, and the news sent PLUG stock jumping by double-digits in early Thursday trading.
This is how a sucker’s rally starts.
As we’ve said before, Plug Power has a bright future. It’s a leader in the exciting and revolutionary technology of electricity-generating fuel cells.
However, as a momentum stock, PLUG trades wildly from headline to headline. The volatility alone makes PLUG stock too risky because it’s far too easy to buy high.
Furthermore, like most momentum names, PLUG stock is too expensive. True, Wall Street analysts figure the fuel cell industry is good for a compound annual growth rate of 20%, but even if PLUG were to double that performance, PLUG stock couldn’t justify its valuation. Heck, PLUG stock doesn’t even have trailing or forward price-to-earnings ratios because it has no earnings and is forecast to remain unprofitable until the second quarter of 2016.
PLUG Stock is Overvalued
To be fair, revenue is growing at a healthy clip. The Street expects sales to grow more than 160% this year, and nearly 80% in 2015. However, that top-line expansion already seems to be baked into the PLUG share price — and then some. PLUG stock carries a price-to-sales (P/S) multiple of nearly 12. Even red-hot Tesla Motors (TSLA) sports a P/S of only 10.
As good as this new contract may be, it sure isn’t large enough to cool off that exorbitant P/S ratio. PLUG will supply a “major North American telecommunications company” with ReliOn integrated fuel cells and GenFuel hydrogen services. It’s great that the telco has a backup plan if the power grid fails, but that doesn’t translate into a game-changer for PLUG. The multi-year contract is valued at $20 million, yet PLUG’s trailing 12 month revenues come to more than $11 billion.
This contract is just a drop in the bucket.
As welcome as the contract is for incremental sales growth, it’s no whopper, so it sure doesn’t justify PLUG stock jumping more than 10% in a session. Besides, PLUG stock has pulled this sort of rally before, and it too often ended in tears. At the point of maximum optimism this year, PLUG stock traded as high as $10-and-change. Even after today’s early moves, PLUG goes for just $3.87.
Furthermore, like all fuel cell names, PLUG stock is flying into the headwind of collapsing energy prices. Crude oil prices have fallen by about a third this year. That’s crushing energy stocks and taking fuel cell providers with it. Indeed, with energy prices falling sharply, the appeal of pricey fuel cells becomes less compelling.
Click to EnlargeLastly, the technicals are working against PLUG stock, too. Shares recently carved out a death cross and that sell signal has been spot on. (See the accompanying chart, courtesy of Yahoo Finance.)
Even if you don’t buy the voodoo of technical analysis, enough traders and investors do to make it a self-fulling prophecy.
As fantastic as its technology may be, the fundamentals and technicals still say PLUG stock is a sell.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
