Plug Power (NASDAQ:PLUG) was doing just fine in November, finishing the month up 47%. Then it announced it was making a secondary offering to sell up to 40 million shares of PLUG stock, and the wheels fell off.
Down 21% in four days of trading, it’s clear investors don’t like the idea of the company diluting Plug Power stock by 17%. If you’re a speculative investor, the secondary offering comes dressed like an opportunity.
If PLUG drops below $3 and you don’t need the money for your kid’s college fund, this might be the ticket you’ve been looking for.
For anyone who’s saving for retirement, you can ignore the rest of this article. PLUG stock is not for you.
A Smaller Piece of the Pie
One of the reasons that Warren Buffett likes share repurchases at the companies whose stocks Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owns is he gets a bigger piece of the pie every time they buy back stock. Fewer shares mean a bigger ownership stake.
Conversely, Buffett wouldn’t be too enamored with a stock in his portfolio if it made a 40-million secondary offering that reduced his piece of the pie by 17%. He’d be downright aggravated.
However, the speculative punter doesn’t have any such concern. You’re merely trying to profit from big moves in a low-priced stock. These are quick hits that line your pocket. Of course, if you sell before the year is up, your capital gains tax is higher, but that’s another subject.
Plug Power has done secondary offerings before.
In 2014, it sold 22.6 million shares of Plug Power stock for $5.50 a share with a 30-day option for underwriters to buy another 15% or 3.4 million shares. Predictably, its stock fell more than 6% on April 25, 2014, on the news.
The company had initially planned to sell 15 million shares in the secondary offering. Still, the demand was so strong that it upped the size of the offering, raising $116 million in net proceeds. Plug Power used what was raised for working capital and acquisitions.
I wonder if any of those buyers are still holding PLUG stock? I expect not.
As a speculative investor, you’ve got to consider whether the latest move lower is a routine correction that happens when companies issue more stock or the start of a much more significant decline.
Plug Power reported Q3 2019 earnings on Nov. 7. The company missed slightly on both the top and bottom line. Analysts were expecting a 6-cent loss; it delivered an 8-cent loss. On the top line, Plug Power’s revenues were $56.4 million, 1.6% shy of the consensus estimate.
Neither miss was terrible, which is probably why its stock continued to move higher through the remainder of November. However, the fact that it had a third-quarter loss that was 14% higher over last year should concern anyone who believes in the company’s $1-billion goal for revenues by 2024 and non-GAAP or possibly even non-GAAP annual profitability.
At the end of October, I suggested that Plug Power’s ambitious goal was either a winning call or another opportunity to disappoint PLUG shareholders. The third-quarter results have done little to sway me in either direction.
InvestorPlace’s Vince Martin recently put into perspective what the secondary offering says about the company’s business.
“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,” Martin wrote Dec. 4. “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.”
That pretty much sums up the ongoing vulnerabilities faced by Plug Power as it continues to push its hydrogen fuel cells to big business.
The Bottom Line on PLUG Stock
As my colleague alluded to in his article about the company, Plug Power remains a speculative dream stock because the rewards for hitting $1 billion in revenue by 2024 are so tremendous.
If you’re a speculative investor, under $3 seems like a great place to buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.