Shares of hydrogen fuel-cell maker Plug Power (NASDAQ:PLUG) are probably most infamous for losing a jaw-dropping 99.9% of their value from 2000 to 2019. But, PLUG stock is making headlines recently for much better news.
Year-to-date, Plug Power stock is up 130%, including a 35%-plus rally in the past month alone. In other words, a stock best known for its secular losing streak has found a winning stride in 2019. The big question now: will this winning stride continue?
I think it could. The hydrogen fuel-cell market continues to be sluggish in terms of consumer market adoption. But, on the commercial side, meaningful progress is being made, and this meaningful progress is powering robust revenue growth and margin expansion at Plug Power.
If these trends persist for the foreseeable future, and there’s a reasonably high chance that they will, then PLUG stock should continue to march higher.
The investment implication? If you have the appetite for a high-risk, high-reward stock and believe in the future of hydrogen technology, PLUG should be on your radar.
Commercial Market Momentum Looks Good
When it comes to Plug Power stock, it’s all about the hydrogen fuel cell market. That market has its positives and negatives. Up until now, the negatives have largely outweighed the positives.
Now, the positives are starting to outweigh the negatives, and the market looks positioned for healthy growth over the next several years.
Long story short, alternative fuel has been a big movement over the past several years as carbon emission problems with traditional fuel sources have been highlighted as a big threat to the global ecosystem. In response, the market has birthed two alternatives – electric cars, and hydrogen cars. The former gets all the hype, mostly because the latter is less efficient, less safe, and lacks sufficient infrastructure to make it a viable alternative.
But, hydrogen fuel cell technology is starting to turn a corner. Somewhat. On the consumer side, adoption remains sluggish thanks to those three aforementioned headwinds. But, in the commercial market, big enterprises are increasingly starting to see hydrogen as a superior alternative to traditional fuel and electricity, because hydrogen fuel cells last longer and have shorter refueling times.
The numbers speak for themselves here. In 2016, Plug Power revenues dropped 20% year-over-year. In 2017, they rose 20%. Revenues rose 75% in 2018, and are up 20% year-to-date in 2019. The implication? Although hydrogen fuel cells have been slow to catch on, they are finally catching on, and in a big way.
Will this trend continue? Probably. The explosion of alternative fuel sources is a secular growth narrative. In that secular growth narrative, electric cars will be the Batman. But hydrogen cars should emerge as a solid Robin. In this sense, Plug Power may be in the early innings of a long term growth ramp.
Plug Power Stock Has Big Upside
If the hydrogen fuel cell market ramp does persist over the next several years, then PLUG stock has substantial upside from current levels.
Management just laid out a five year growth plan wherein the company is going to leverage HFC expansion in its core commercial end-markets to drive revenues towards $1 billion and EBITDA towards $200 million by 2024. That would represent huge growth from 2019’s projected bases of ~$230 million in revenue and ~$1.3 million in EBITDA, according to Street consensus estimates.
Will Plug Power actually grow revenues at a 30%-plus clip and EBITDA at a near 200% clip into 2024? Probably not. It pays to remember that, back in 2015, this same management team said that Plug Power would report $500 million in revenue by 2020 on 35% gross margins.
Last year, revenues were just $175 million, and gross margins were at 1.5% – neither are on track to hit those aggressive targets from 2015. Instead, 2020 revenues will likely shake out around $300 million (40% shy of the target), while gross margins may get to 30%, at best.
In other words, investors should take management’s call for $1 billion in revenue and $200 million in EBITDA by 2024 with a grain of salt. It probably won’t happen.
The good news is that PLUG doesn’t need $200 million in EBITDA by 2024 to rally from here. In reality, Plug Power will likely leverage commercial market expansion and margin expansion to drive revenues and EBITDA towards $600 million and $100 million by 2024, respectively. Still, that combination should produce around $0.35 in EPS in 2024.
Based on a 16-times forward earnings multiple and a 10% discount rate, that equates to a 2019 price target of nearly $4. That is way up from today’s sub-$3 price tag. Thus, even if Plug Power only accomplishes a fraction of its aggressive five-year targets, the stock should work from here.
Bottom Line on PLUG Stock
It appears the hydrogen fuel cell market, while still speculative, is gaining momentum and traction. If this momentum persists over the next few years, Plug Power will report consistently robust revenue and profit growth, and all that growth should ultimately propel PLUG stock higher from today’s depressed levels.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
