The story with Plug Power (NASDAQ:PLUG) has seemed simple. If the company hits its five-year targets for revenue and profit growth, PLUG stock is going to gain, and likely will gain nicely.
How high PLUG stock could go if targets are met admittedly is up for some debate. Earlier this year, I argued that valuation based on EBITDA (earnings before interest, taxes, depreciation and amortization) looked to be above $7. Based on EPS (earnings per share), the figure looked closer to $9.
On this site last month, Luke Lango laid out a bull case target of $12 in calling PLUG a lottery ticket stock to buy. Given that one of Lango’s other picks was Stage Stores (NYSE:SSI), the market’s best stock in recent months, that analysis is worth considering.
But whatever the exact valuation target, the broad case holds. With the PLUG stock price currently below $4, shares should double in five years, and maybe triple, if management delivers on its promise.
That’s long been a dangerous ‘if,’ however. Plug Power has a two-decade history of underperforming. A stock offering announced Monday, which sent PLUG tumbling by over 10% in trading Tuesday, reminded investors of the very real risks still involved in PLUG stock.
Plug Power Stock Rises (Again) After Earnings
Trading in PLUG following the company’s third-quarter earnings report last month highlights the opportunity here. On its face, the report doesn’t look like much. Revenue increased by just 6% year-over-year. Gross margin still sits below 10%. Adjusted EBITDA was positive, but Plug Power still is burning cash. Indeed, “interest and other expenses” was over $8 million in the quarter, dwarfing the $2.5 million in Adjusted EBITDA.
Headline numbers aside, the quarter doesn’t seem to change the outlook all that much. The results were basically in line with Wall Street expectations. Full-year guidance was reiterated. So were the 2024 targets released in September.
PLUG actually declined 6.7% on Nov. 7, the day earnings were announced. Following that bounce, however, it gained 43% to Monday’s close. It’s not terribly difficult to see why that is.
The Case for PLUG Stock
One reason is that even an in-line quarter is good news for Plug Power at this point. Again, this is a company that has disappointed for basically this entire century. Targets have been missed repeatedly. Plug Power has been on the razor’s edge of bankruptcy on several occasions, only to narrowly avoid the fate that befell other fuel cell plays like ClearEdge Power.
The reason PLUG stock sat below $3 heading into earnings was that investors simply didn’t believe the 2024 targets. Two decades’ worth of history support that skepticism. Indeed, it took all that time for the company to simply drive its first quarter ever of positive Adjusted EBITDA, which came in last year’s fourth quarter.
So from that perspective, an in-line quarter is good news. As long as near-term targets are reaffirmed, and Plug Power remains on track to reach long-term goals, its stock can keep rising.
To be sure, a pair of analyst upgrades have helped, including one from Roth Capital calling out a potential “inflection point.” Plug Power picked up Fiat Chrysler (NYSE:FCAU) as a new customer, adding to an impressive list that includes Amazon.com (NASDAQ:AMZN), Walmart (NYSE:WMT), and Procter & Gamble (NYSE:PG). Another “multi-site” customer will be announced soon, per the Q3 conference call.
Even at the current valuation, Plug Power doesn’t need its quarterly reports to wow investors or shatter expectations to move higher. As long as it’s on track for 2024 targets, that’s still good enough.
The Stock Offering
All that said, there are reasons for caution here. At Monday’s close, PLUG had risen 283% from its 52-week low. Clearly, the market has priced in some of the recent improvements.
And while upside will be impressive if the company meets its targets, there’s still work left to do. The company needs more cash to fund its vendor financing option for customers, in which Plug Power delivers its solutions upfront while receiving cash over time.
As the company noted in its Q3 shareholder letter, it’s doing some of that through so-called ‘sale-leaseback’ transactions. But it also had to raise $40 million in convertible debt on onerous terms. And interest expense, still on track to exceed $30 million this year, provides a substantial headwind to the achievement of positive free cash flow and net income.
The sale-leasebacks weren’t enough. Thus, the required stock offering. Plug Power plans to issue 40 million shares, with the potential for underwriters to purchase an incremental 6 million. It’s likely the offering would be priced in the low $3 range, which suggests Plug Power could raise roughly $150 million.
That’s a good news/bad news situation. The bad news is that the 46 million new shares will dilute existing shareholders. A current owner’s stake in the company will shrink by about 15%. That explains part of the reaction toward PLUG stock today.
But it may also be that the offering reminded the market of just how far Plug Power has to go. There’s a real opportunity here — but there’s still a real risk and a business that continues to burn cash as it has for two decades. The post-earnings rally in PLUG stock made some sense, but it may well have gone too far.
Where We Go from Here
Put another way, the offering is a sign that the company still has many of the problems of the ‘old’ Plug Power, a company in which investors showed little confidence. Better results in 2018-2019 don’t completely erase the memory of disappointments of 1999-2017. Debt remains a problem. Financing is only available at double-digit interest rates, or through dilution of existing shareholders.
Meanwhile, success isn’t guaranteed. Q3 earnings were solid enough to move PLUG stock higher, but the company needs 17 more of those quarters to hit its long-term targets.
All that said, the offering is good news from at least one important perspective: the story is de-risked. Plug Power now should have plenty of cash. It can invest in the business, fund new customers if need be, and repay the convertible debt and other borrowings, lowering interest expense going forward.
The story with PLUG now seems back to the simple thesis it’s been: if the company hits its targets, the potential rewards in Plug Power stock remain impressive. There’s certainly evidence in recent quarters that the company’s promise is being fulfilled, and enough positives to at worst take a long look at PLUG shares here.
From that standpoint, the stock offering shouldn’t really change the long-term outlook here. Investors who believe in Plug Power still should do so. Skeptics should stay away. Yes, PLUG has a cheaper price, and dilution is a concern. But the story is cleaner, and the stock is cheaper. That’s the good news for investors willing to take the plunge.
As of this writing, Vince Martin has no positions in any securities mentioned.