For two decades now, Plug Power (NASDAQ:PLUG) has been a disappointment. The PLUG stock price sits below $3; on a split-adjusted basis, it cleared $1,000 during the dot-com bubble. Plug Power stock admittedly has doubled so far this year, but it’s still down 38% over the past five years and has lost two-thirds of its value over the past decade.
That history still colors PLUG stock. But as I wrote earlier this year, it’s starting to look like this time might actually be different. Investors forgave what looked like a disappointing first-quarter report — and have been rewarded as a result. Plug Power bounced back with a strong second quarter, and the PLUG stock price briefly touched a 21-month high this month.
And there could be more upside ahead. Last week, Plug Power management unveiled a five-year plan that could lead to enormous upside in Plug Power stock. The company is targeting $1 billion in revenue and $200 million in Adjusted EBITDA. Hitting those targets would likely lead PLUG shares to triple.
The question is if management can hit those targets. The company’s history suggests caution on this front. But, again, this time might well be different — and if it is, PLUG stock will be one of the market’s best.
What the Five-Year Plan Would Mean for the PLUG Stock Price
Plug Power’s goals certainly are ambitious. The company aims to generate $1 billion in revenue in 2024. That’s more than quadruple the $236 million in sales analyst expect for 2019. Plug Power would generate significant profit as well, with the company targeting $170 million in operating income and $200 million in Adjusted EBITDA.
It’s difficult to model exactly what interest expense might be at that point. Plug Power still is burning cash, so it may not be able to pay down much, if any, debt over that stretch. 2019 interest likely comes in at $17 million on a cash basis. Using that figure and a 25% tax rate, adjusted EPS could be as high as 45 cents five years from now.
Any reasonable valuation for Plug Power stock suggests enormous upside. 10x EBITDA seems conservative for a company that had quadrupled sales in five years (a 32% compound annual growth rate). But it would likely get Plug Power to at least $7 — 160% upside. 20x EPS — again, a conservative multiple — would get PLUG near $9. That’s a clean triple, and then some.
How Plug Power Hits Its Targets
According to a presentation prepared with the five-year plan, the core Plug Power business will drive most of the growth. Plug Power is targeting $750 million in revenue from its Material Handling business — the fuel cell-powered forklifts currently used by major clients including Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT) and Procter & Gamble (NYSE:PG).
But new initiatives also will contribute. Plug Power has rolled out fuel cell-powered vehicles for DHL, a unit of Deustche Post (OTCMKTS:DPGSY). It sees $200 million from that business. Another $50 million comes from power stations, getting Plug Power to the billion-dollar mark.
On their own, the targets don’t look particularly aggressive. The combined addressable market for the three businesses exceeds $240 billion. 1.5 million forklifts are sold annually: Plug Power targets thus requires less than 2% market share. On the vehicle side, fuel cells do have potential applications: Toyota (NYSE:TM) is reportedly considering using the technology for hybrid cars.
Meanwhile, costs come down over time as Plug Power improves manufacturing efficiency. And scale further lowers unit costs. Margins thus expand nicely with revenue growth, potentially putting the aggressive profitability targets within reach.
The Risks to Plug Power Stock
The path to $1 billion in revenue looks almost easy in a presentation. In practice, it may well be much more difficult.
Again, this is a company that’s been public for nearly twenty years. It achieved positive Adjusted EBITDA for the first time ever in last year’s fourth quarter. Guidance for this year suggests positive, but undefined, Adjusted EBITDA. Free cash flow almost certainly will be negative, and the company closed the second quarter with $166 million in debt.
Meanwhile, fuel cell technology isn’t exactly new — and on the vehicle side, it has its doubters. Tesla (NASDAQ:TSLA) CEO Elon Musk has argued that “fool cell” efforts were “mind-boggingly stupid.” With major automotive manufacturers focusing on electric and hybrid cars and trucks, competition is a factor as well.
The very fact that the PLUG stock price sits below $3 itself is a verdict on the market’s confidence in the plan. Even conservative valuations at $1 billion in revenue suggest a current stock price of at least $4.
Investors don’t yet trust Plug Power, even though the company has met recent targets under CEO Andy Marsh. But the case for Plug Power stock is that this is a different, and better company. That company now has five years to prove it.
As of this writing, Vince Martin has no positions in any securities mentioned.