Plug Power (NASDAQ:PLUG) has had a great 2019. Since January, shares have rallied from $1.24 per share to $2.93 — around a 136% gain. But, in recent weeks, the stock has pulled back from its 52-week high of $4.04 per share.
And, thanks to a recent secondary offering priced at $2.75, dilution fears have come true.
Plug Power has big goals. $1 billion in revenue, and $200 million in EBITDA by 2024. But, these big dreams require big cash. Given the company’s current unprofitability, outside capital is key to keep the growth train humming. However, this recent capital raise is a prime example of why this stock is a risky play.
The company may believe its hydrogen fuel cell (HFC) technology is the wave of the future. So far, though, it has had to pay a pretty price to build its popularity. Plug Power could very well meet its five-year financial plan, but shareholders entering the stock today may see minimal benefit.
Let’s dive into recent developments with Plug Power. While investors have won this year with the stock, 2020 may not bring outstanding returns.
How Big Will Your Piece Be Once Plug Power Slices The Pie?
When it comes to story stocks, Plug Power spins a great tale. We live in an era where electric vehicles are the hot topic. But Plug Power offers an alternative energy blast from the past in HFC technology.
HFCs may not be the best replacement for cars and trucks. However, it makes a great fuel source for forklifts and other warehouse vehicles — and Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) agree. Both retail giants now use Plug Power’s technology to fuel their forklifts, and this deal provides tremendous social proof for the relatively small company.
Nonetheless, this social proof comes at a price. In order to win the business of Amazon and Walmart, Plug Power issued warrants to both companies. Dilution is part and parcel to the Plug Power story.
As of Nov. 8, Plug Power had around 261 million outstanding shares — but now, add in the recent 40 million share offering. The underwriters also received 6 million warrants, and now add in 217.9 million dilutive potential common shares from prior transactions. That’s a lot of dilution!
With this high level of dilution, investors could see less upside than anticipated. The pie is still in the oven, but once it cools, investors in the common stock today may get a smaller slice than they anticipated. Add in another “growth buying” tool called vendor financing, and there’s more that meets the eye with Plug Power’s growth strategy.
Vendor Financing Could Make or Break Plug Power
Issuing warrants is not Plug Power’s only means to entice big buyers. Recent articles by Henrik Alex of Seeking Alpha have dug into the company’s use of vendor financing. Previously, Plug Power extended vendor financing to Walmart. However, the company now plans to extend this to other customers through what they call “subscription business.”
Software-as-a-Service (SaaS) is an asset-light business. In contrast, this “subscription business” — aka vendor financing — is capital intensive. Without the strongest of balance sheets, Plug Power needs either expensive debt capital or dilutive equity capital to sustain this growth tactic. This is likely why the company had the secondary offering.
On the other hand, financing is a key part of the capital goods business. Where would the major automakers be without their finance divisions? There is nothing inherently wrong with the vendor financing model. It may cost Plug Power a pretty penny today, but this type of incentive may be necessary for the company to finally reach profitability.
Now, though, I’m entering the same daydreaming Plug Power’s management could easily be accused of. The company has been in business for 20 years, and has a bad track record of over-promising and under-delivering. The company claimed on numerous occasions from 2013-2016 that it was on the cusp of breakeven.
“This time it’s different” could be the case — but take any talk from management with a grain of salt.
Still Skeptical, But Don’t Go Short
Despite the blue-chip clients and major market listing, Plug Power still comes across too much like a “penny stock” — and not in a good way. Between the creative financing and heavy touting by management, the odds are that Plug Power will stumble rather than prove the shorts wrong.
That’s not to say it’s prime time to short the stock. All it takes is one “game-changer” event like the signup of a major customer to move this stock even higher. Even with dilutive equity raises, retail investors are looking at top-line projections and not the outstanding share count.
Who knows? Plug Power’s aggressive growth may not be foolhardy. While its vendor financing strategy is pricey now, it may help Plug Power finally scale to profitability. Dilution may eat up some of the upside, but long term, it could be worthwhile for investors buying shares today.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
