Once upon a time, shares of hydrogen fuel-cell maker Plug Power (NASDAQ:PLUG) were trading hands for around $1,500. That was back at the peak of the dot-com bubble in 2000. Since then, PLUG stock has quite literally lost 99.9% of its value.
Today, PLUG stock trades hands around $2 and change.
Why the huge multi-decade plunge in PLUG stock? Because the hydrogen fuel-cell market — while promising — has remained elusive forever. To be sure, things are finally starting to progress on the commercial side of the hydrogen market. That’s why PLUG stock soared from $1 in late 2018, to nearly $3 earlier this year. It’s also why Plug Power is expecting to report record second-quarter numbers at the beginning of August.
But consumer market adoption trends have remained sluggish for several years. Given recent hydrogen fueling station explosions in Northern California and Norway, those consumer market-adoption trends project to only get worse for the foreseeable future.
The big problem with Plug Power stock is that it remains to be seen whether or not commercial hydrogen fuel-cell market traction is enough to sustain the business — given that the company has been, still is, and projects to keep burning cash, against the backdrop of a debt-burdened balance sheet.
Thus, the investment implication here is simple. Until the financial trends meaningfully improve — or until the consumer side of the hydrogen fuel-cell market gains momentum — avoid PLUG stock.
Commercial Success, but Consumer Market Failures
When it comes to Plug Power stock, you have a tale of two cities. On one end, you have a booming commercial market that is rapidly adopting hydrogen fuel-cell cars. On the other end, you have a sluggish consumer market that continues to avoid hydrogen fuel-cell cars in favor of electric vehicles.
In the commercial world, large enterprises that have tons of trucks and large freight expenses are starting to come around to the benefit of hydrogen fuel-cell technology as a more abundant and cleaner alternative to gasoline, and a more reliable alternative than electricity (relative to EVs, hydrogen fuel-cell cars last longer and have shorter refueling times).
Consequently, as these large enterprises are looking to go green and cut down on carbon emissions, some of them are opting for hydrogen over electricity. That’s why fuel cell unit delivery volume increased 70% in the second quarter of 2019.
On the flip side, you have the consumer market, which remains sluggish. Consumers continue to shun hydrogen cars in favor of electric vehicles. Why? Three big reasons. One, hydrogen cars are significantly less efficient than their EV- and gas-powered peers. Two, there is very minimal infrastructure for hydrogen cars. Three, safety is a huge issue, as highlighted by recent hydrogen fueling station explosions in Norway and Northern California.
As a result, consumers have continued to avoid hydrogen cars. Following the recent hydrogen fueling station explosions, it is likely that consumers will continue to shun hydrogen cars for the foreseeable future.
All in all, then, Plug Power over the next several months will be very similar to what it has been over the past few months — a commercial success with a sluggish consumer market.
Plug Power Stock Is Dangerous Without Consumer Market Success
The problem with Plug Power stock is that it remains to be seen whether or not the company is financially viable without consumer market success.
That is, Plug Power’s commercial business has been progressing with great pace for several quarters now. Yet, over the past three years, the company has reported free cash flow in excess of negative $30 million every year. Sure, one could argue that economies of scale will kick in here. Once Plug Power’s commercial business gets really big, the negative free cash flow will inflect into positive territory.
But, it is unclear just how big the commercial business could get. At gross margins of just 1.5% last year, Plug Power is going to need a lot of scale in order to become profitable and turn cash flow positive. At the same time, today’s cash burn is especially bad because Plug Power is loaded up with over $285 million in debt on the balance sheet. The cash balance stands at under $110 million.
The one thing that could save the day here is consumer market momentum. It would give investors more visibility to Plug Power achieving sufficient scale in the future. But, until that momentum materializes, PLUG stock is best avoided.
Bottom Line on PLUG Stock
There is a possibility that Plug Power stock is a multi-bagger in the making. But, that possibility requires a lot of “ifs” that likely won’t materialize — the most important of which is “if consumers start turning towards hydrogen cars instead of electric vehicles”.
Current trends and events — namely, huge hydrogen fueling station explosions in Northern California and Norway — imply that this “if” remains as intangible and unlikely as ever.
As such, for the foreseeable future, it is probably best to avoid PLUG stock.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
