In early May, I addressed whether investors should buy or sell Plug Power (NASDAQ:PLUG) before it released first-quarter results. Through the first four months of 2019, PLUG stock had doubled in price. That left those who bought at the end of 2018 with a difficult choice.
I concluded that if you bought Plug Power stock for a long-term hold of three to five years, you should hold through earnings. If shares dropped by a significant amount, the volatility would offer a discounted opportunity.
The day of the article, the PLUG stock price closed at $2.46 a share. On May 8, it announced less-than-stellar earnings that sent shares down as low as $2.16 the next day. However, it has since recovered all of those losses and then some.
That’s good news.
The bad news is that I no longer feel comfortable recommending Plug Power stock to anyone but speculators. Here’s why:
The Q1 2019 Earnings Report Wasn’t Good
In the first quarter, Plug Power saw revenues decline by 30% year-over-year to $18.6 million. The company has five items included in total revenue.
In Q1 2019, the sale of fuel-cell systems was less than half what it was a year earlier; it had no sales of hydrogen installations compared to $4.6 million a year earlier. The company’s revenues are highly variable and tough to predict.
Analysts expected revenue of $34.5 million. If the professionals missed by almost $16 million, how can regular investors possibly think they’ve got an edge on them? I don’t think they do, which makes Plug Power stock especially treacherous.
The Earnings Report is a Tough Read
Plug Power CEO Andy Marsh blamed the poor results on sales that closed after the end of Q1. The company’s quarterly press release stated:
While gross billings were down year over year in what is our seasonally lowest quarter, it is important to note that these numbers were negatively impacted by end of quarter project timing around revenue recognition. This is reflected in our higher quarter end inventory balance of $65.5M compared to quarter-end inventory of $47.9M in Q4 2018.
It went on to say that the timing affected gross billings by $10 million. If you add those back, Plug Power increased gross billings by 15.9% in Q1. In Q2, it expects gross billings to grow by more than 100% from $22.8 million in the first quarter.
As a company, I believe Plug Power’s got tremendous potential. However, unless you’re very good at handling volatility in earnings and sales, the company’s revenue model is too darn complicated. It also lends to an unpredictable profile for the PLUG stock price longer term.
For example, the sale of power purchase agreements (PPAs) and services are recognized as revenue over five to seven years. That means the variability in its revenues — these two line items accounted for 59% of Q1 2019 sales — will never go away.
It Doesn’t Make Money
As I stated in early May, although Plug Power isn’t profitable, it’s getting closer on a non-GAAP basis.
In Q1, its adjusted EBITDA loss was $6.7 million, 33.5% lower than in the same quarter a year earlier. In fiscal 2018, Plug Power’s adjusted EBITDA loss was $17.5 million, 46.7% lower than in 2017.
That’s all very good, but you can’t pay your bills with almost making money. You either are, or you’re not.
For investors who are using tax-deferred or tax-free accounts to invest in Plug Power stock, you’re making a critical mistake. That’s because if you take a loss on PLUG shares, you can’t utilize the capital loss against other gains.
Therefore, it makes sense to limit your retirement accounts to companies that at least make money.
The Bottom Line on PLUG Stock
Plug Power is doing some fantastic things. That’s why companies like Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) are buying a ton of product from them.
If you must own PLUG stock within a retirement account, I’d do it through Amazon. If you’re an aggressive investor accustomed to risk, I’d continue to buy it whenever it drops below $2.25.
Long-term, I think it will make money, but we won’t know for sure until it does. For now, PLUG stock is simply a vehicle for the speculators.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
