Plug Power Stock May be Cheap, But It’s Cheap for a Reason

On the surface, Plug Power (NASDAQ:PLUG), the maker of membrane fuel cells, can certainly be seen as a seductive stock, particularly for those that like low-priced securities. Plug Power stock fits that bill, residing at just over $2 a share on the back of a year-to-date gain of more than 78%.

Plug Power Stock May be Cheap, But It's Cheap for a Reason

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Of course, the skeptical investor can and should ponder why a stock that’s up 78.23% year-to-date closed at just $2.21 on Tuesday, Aug. 20 as did Plug Power stock. Plug Power stock is one of those cheap (by price), innovative companies that has a way of getting some investors to rally around the idea of “potential.” When in reality, there are a lot warts for investors to consider.

Those warts include an unclear path to profitability and high client concentration. As one of my InvestorPlace colleagues recently noted, last year, Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) combined to account for two-thirds of Plug Power’s revenue. Regardless of a company’s size, investors should be leery of a lack of revenue diversification.

“The company intends for its fuel cells to provide electricity to homes as an alternative to the existing electric utility grid and other power generation technologies,” according to Morningstar.

Translation: The company operates in the hot alternative energy niche, likely another reason why some investors have been captivated by Plug Power stock.

Plug Power Is Looking to Expand

While counting Amazon and Walmart among clients makes for an enviable roster, Plug Power deserves some credit for at least trying to diversify that mix. For example, the company recently unveiled plans for its fuel cells to power FedEx (NYSE:FDX) ground vehicles at an upstate New York airport.

“FedEx has been running the vehicles — called tuggers — with Plug fuel cells for months at the Albany International Airport, surviving temperatures as cold as 4 degrees Fahrenheit and as hot as 90 degrees Fahrenheit,” reports The Albany Business Review. “The challenge now is getting the fuel cell engines for airport ground equipment to market. It is one of the first signs that Plug is diversifying beyond its core market of fuel cell engines for forklifts in warehouses.”

Indicating that PLUG stock is positively correlated to such news, reports on the Albany Airport venture broke last week. And this week, shares of Plug Power are higher by almost 5%. Increased infrastructure spending is another potential long-term catalyst for Plug Power stock.

“I think when you look at commitments that are being made by large companies that they view that this industry that there’ll be over $300 billion of investments over the next 10 to 12 years,” said CEO Andrew Marsh on the company’s second-quarter earnings conference call. “Obviously, infrastructure is part of that. And when I take a look, I have a parochial view of this. But I think the fact that Plug Power has deployed more units, has built more hydrogen infrastructure, used more hydrogen than anyone else, which we think is a real long-term opportunity for the company.”

The Bottom Line on PLUG Stock

For investors that like alternative energy and are already engaged with solar or wind securities, PLUG stock could be a low risk, high reward complement to those strategies. While the name isn’t an appropriate holding for conservative investors, management’s ability to at least drive lower losses and better top line could make Plug Power stock a winner, but probably not a stellar secular story.

Fair value for PLUG stock is probably just north of $3, representing compelling upside from current levels. But to get there, the shares will need management to increase revenue breadth and for small caps to come back into style.

Todd Shriber does not hold any of the aforementioned securities.

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