Plug Power Inc (PLUG) Stock May Not Be a Smart Buy Yet

Investors who bet on fuel cell company Plug Power Inc (NASDAQ:PLUG) this year must be thanking their lucky stars after nearly doubling their money at one point. PLUG stock has racked up gains of 81% in the year-to-date — a far cry from last year, when it finished more than 40% down.

Plug Power Inc (PLUG) Stock May Not Be a Smart Buy YetThe latest rally came about 10 days ago after the company announced that it had struck an expanded deal with Wal-Mart Stores Inc (NYSE:WMT) that will see the company supply GenKey hydrogen fuel station and fuel cells to 30 extra Walmart stores over the next three years.

The two companies have an existing deal that is set to expire this year. The new contract therefore ensures that Plug Power does not lose an important customer.

PLUG Stock Is Catching the Big Fish

The Walmart deal is at par, revenue-wise, with the, Inc. (NASDAQ:AMZN) deal that the company signed in April. The 2017 commitment alone for the Walmart deal is worth a cool $80 million, a big deal for a company with trailing-12-month revenue of $86 million. The Amazon deal, on the other hand, will see the ecommerce giant buy $70 million worth of Plug Power products during the current year and double that in 2018.

PLUG stock jumped more than 70% on the back of the blockbuster Amazon agreement. The Walmart deal helped PLUG stock climb another 15%.

The renewal of the Walmart deal as well as the nabbing of a new large customer is a big endorsement of Plug Power’s market leading position in fuel cell products. The two behemoths will contribute more than 70% to Plug Power’s top line over the next couple of years, providing excellent revenue visibility for a company whose revenue growth had started slipping in reverse mode.

Plug Power Shareholder Dilution

So much for the good news. Once you look past the revenue part and delve into the nitty gritty of the two deals, you begin to see why they might not be so gilt-edged after all. If things play out as planned, both deals could eventually lead to substantial dilution for existing shareholders, something that rarely goes down well with investors.

The Amazon deal warrants the company to purchase 55 million Plug shares, or nearly 25% of outstanding Plug shares, over the next couple of years. The bad part for existing investors is that first stage of vested warrants gives Amazon the option to buy 35 million PLUG shares at $1.18, which is extremely generous considering it represents a huge 45% discount to current share price.

The Walmart agreement is not much better either in terms of shareholder dilution, since it issued warrants for WMT to purchase up to 55.3 million common shares of PLUG stock with the first set of 5.8 million vested immediately after the deal was inked. Additional warrants could add up to a total of $600 million, more than Plug Power’s current market cap of $485 million.

PLUG Stock Remains a Speculative Long-Term Bet

But that’s not all that long-term investors have to worry about. There is a sea of red ink soaking virtually all hydrogen fuel cell companies’ balance sheet, and Plug Power’s is not any different. The company remains deeply in the red, and losses keep expanding as expenses grow faster than revenues.

Plug Power’s profit problem is not unique to the company. Fuel cell companies need to move from batch manufacturing to mass manufacturing for the economics to come together. But right now this is not possible since there are no clear-cut standards in the industry, making it hard to develop components in large volumes and bring costs down. This is an industry that’s still going through growing pains, and does not seem to be closer to the end product than it was five years ago.

With no clear-cut road map to profitability, you can expect PLUG stock to continue making huge jumps whenever a new deal is announced, then giving up all its gains in the ensuing months. It happened when the original Walmart deal was announced in 2014, and appears to be happening right now as we speak.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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