Even after a correction of 27% from the highs of 2019, Plug Power (NASDAQ:PLUG) stock is higher by almost 100% from December 2018 levels. The rally in the PLUG stock price has been triggered by strong revenue growth, expectation of positive EBITDA in the fourth quarter and an optimistic growth target for the coming years.
After a sharp rally, I believe that Plug Power stock is likely to remain sideways or trend lower in the coming quarters. Unless something radical happens, I’ll likely remain cautious on shares for these reasons:
Client Concentration Is a Concern
In the material handling and airport equipment segment, Plug Power boasts a long list of blue-chip clients. They include Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), BMW, General Motors (NYSE:GM), Honda Motor (NYSE:HMC), Toyota (NYSE:TM), Procter & Gamble (NYSE:PG), Carrefour (OTCMKTS:CRRFY), among others.
However, for the year ended December 2018, Amazon and Walmart contributed to 66.7% of revenue.
While I am not suggesting potential losses of clients, PLUG’s business scalability is questionable. That’s especially the case for a company that has witnessed meaningful equity dilution.
It is worth noting that company’s agreement with Walmart commenced in 2014. Furthermore, the multi-year agreement with Amazon was initiated in 2016. During the five-year period from 2014 through 2018, the company’s revenue has grown at a CAGR of 22.3% with sustained cash burn. With a small revenue base, growth has been muted.
Plug Power does expect to accelerate growth in the coming years. However, with EBITDA just expected to turn positive in 2019, cash burn is likely to sustain. This might imply further equity dilution. Thus, the PLUG stock price can remain sideways to lower even if top-line growth is healthy.
Looking Beyond Material Handling Equipment
The key focus for Plug Power stock has been the material handling equipment. However, the company does not expect the segment to be a growth driver in the coming years.
The next three to five years is likely to focus on expansion in the medium- and light-duty vehicles segment. On this front, the ProGen engine can be a game-changing product. Plug Power has already signed a deal with StreetScooter (a subsidiary of DHL) for delivery of ProGen hydrogen fuel-cell engines.
The important point to note is that StreetScooter will initially deliver only 100 hydrogen fuel cell-powered trucks for on-road use. Therefore, the contract does not immediately add meaningful revenue.
Based on the initial response, the order flow can potentially accelerate. The positive point is that the deal allows Plug Power to make inroads in terms of contact with electric vehicle manufacturers. The global EV market is likely to swell to $912 billion by 2026.
Even if Plug Power taps the logistics service market, there will be enough potential to expand.
Another potential positive for PLUG stock is expansion in the European markets. The agreement with StreetScooter coupled with an expanded contract with FM Logistic will help the company make its presence felt in a big market.
The key question remains business scalability. The current contracts are relatively small in terms of adding to the backlog.
As a matter of fact, Plug Power reported an order backlog of $540 million for the year ended December 2018. Importantly, the backlog has an execution period that ranges from 90 days to 10 years. Therefore, revenue visibility needs a boost in the coming years if PLUG stock is to trend higher.
Final Words on PLUG Stock
Plug Power has a strong revenue guidance of $235 million to $245 million for 2019. In addition, the company expects revenue in the “medium-term” to increase to $450 million to $550 million.
This growth is only possible if the company’s ProGen sales gain traction in the medium and light-duty vehicle segment. The company is also looking at hybrid buses and small to mid-size cars as potential markets. However, it is too early to assume or conclude that these markets will deliver in terms of product acceptability and revenue growth.
It therefore makes sense to remain in the sidelines. With a target to accelerate growth, Plug Power will need funding. Further, equity dilution can negatively impact PLUG stock.
More importantly, it remains to be seen if the company’s products gain wider market acceptance.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
