Plug Power (NASDAQ:PLUG) stock has performed well year-to-date. The hydrogen fuel cell company has seen its shares soar from $1.24 in January to $2.30 today. Despite the company’s many issues (no profitability, dilutive capital structure), investors have high expectations for the company’s future prospects.
But is PLUG stock a buy?
Plug Power talks a good game, but has yet to show tangible results. The company’s hype could burn investors if actual results fail to meet expectations.
High Expectations for Q2
According to their June 26, 2019 press release, Plug Power is “on pace for the largest second quarter in company history.” Plug Power states that fuel cell deployments are set to increase “70% from the second year prior quarter.” Sales are “on target to meet full year guidance of $235 to $245 million in gross billings,” with “positive adjusted EBITDA” for 2019.
This is in stark contrast to results from last quarter. In Q1 2019, gross billings were only $22.8 million. Operating cash flows were at $36.3 million. Inventory was up year over year (YoY) from $47.9 million to $65.5 million.
The company claims Q1 results are the product of “end of quarter project timing around revenue recognition.” Plug Power also notes the seasonality of their business, with two-thirds of sales occurring in the second half of the year.
The company’s hype of earnings more than a month prior to their release (early August) is a red flag. Speculation, not tangible results, is the current driver of the PLUG stock price.
PLUG Stock Investors Have Bought the Hype
The key catalyst for the stock is new product development. Investors have bid up the PLUG stock price, expecting these new innovations to move the needle.
Prior to the company’s launch of ProGen, the company focused on the materials-handling business. Plug Power’s GenDrive line of products provide fuel cells to power forklifts.
But with the launch of the ProGen line, investors expect Plug Power to enter an even bigger market: delivery trucks. Plug Power has inked a deal with European electric vehicle maker StreetScooter to provide fuel cell engines for 100 of their vehicles.
There’s an even bigger potential catalyst that could move the PLUG stock price. There is some speculation that Plug Power could win big if Amazon (NASDAQ:AMZN) decides to purchase ProGen fuel cell engines in conjunction with bringing logistics in-house.
As Plug Power’s second-largest customer, Amazon already has an involvement with Plug Power. In 2017, Amazon received warrants to buy up to 55.28 million shares of Plug Power stock, in conjunction with Amazon’s purchase of GenDrive products for their warehouse operations.
But does this equal future Amazon involvement? With the warrants, Amazon has a clear financial incentive to buy fuel cells from Plug Power. But with announced deal, the Amazon rumors remain speculation.
Valuation: PLUG Is in Line With Peers
Plug Power’s main publicly-traded competitors are Ballard Power Systems (NASDAQ:BLDP), and Hydrogenics Corporation (NASDAQ:HYGS). Neither Plug Power nor its competitors generate net earnings, so other sales metrics are needed to do a comparison.
Looking at the enterprise value to sales metric (EV/sales), PLUG appears to be fairly valued. The TTM EV/sales ratio for PLUG is 4.82, lower than both BLDP (8.98) and HYGS (8.07).
Unlike its competitors, PLUG has shown YoY sales growth (about 50%). BLDP and HYGS have seen sales declines of 22% and 28.8%, respectively.
Plug’s Capital Structure Could Lead to Shareholder Dilution
According to Plug Power’s last 10-Q filing, the company had 245.4 million outstanding shares. But add in 21.1 million outstanding stock options, 2.37 million restricted shares, 115.8 million warrants, preferred stock convertible into 17.9 million shares, and senior notes convertible into 43.63 million shares, and the number of “dilutive potential common shares” is 200.87 million. This increases share count by about 82%.
If Plug Power reaches profitability, the dilutive capital structure minimizes potential upside. Investors should keep this in mind before buying PLUG stock.
Bottom Line: Plug Stock More Hype Than Opportunity
Fuel cell technology will likely remain a niche product, but may gain heavy market share in delivery fleets. This trend could add fuel to the PLUG stock price.
Plug Power is moving in the right direction by targeting the electric delivery vehicle market, but needs capital to turn this strategy into profits. The company’s capital structure is already potentially dilutive. Future capital infusions could further reduce potential upside for PLUG common stock holders.
Investors have bid up Plug Power stock on high growth expectations. But with lack of tangible performance results until August, Plug Power is not a buy today.
On the other hand, investors should be cautious trading around Plug Power stock. Given the company’s small size (market cap of $569 million), any crumb of “good news” could send PLUG stock price higher.
It’s tough to “predict the unpredictable.” With Plug Power, there are too many questions, and not enough answers.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
