Shares of hydrogen fuel cell (HFC) maker Plug Power (NASDAQ:PLUG) have been hot all year long, as HFC technology has gained traction in some commercial auto markets. However, after rallying from $1 in late December 2018 to $4 by late November 2019, PLUG stock has since fallen off a cliff — dropping below $3 in a matter of weeks.
The culprit? A public offering of 40 million common shares at a price of $2.75 per share. When the offering was announced, PLUG stock was trading hands near $4. Naturally, since the offering has been announced, Plug Power stock has retraced its way back closer to the $2.75 offering price.
In the big picture, this recent plunge in PLUG stock offers an interesting buying opportunity for risk-seeking investors.
The big idea here is simple. Plug Power stock is a high-risk, high-reward bet on continued commercial and consumer adoption of HFC technology. At this point in time, that seems like a good bet. If HFC tech does continue to gain traction, Plug Power will grow exponentially over the next few years. All that growth could reasonably push PLUG stock towards an $8 price tag within the next several years.
There are major risks to this big-picture bull thesis. However, a public share offering in late 2019 is not one of them. As such, the thesis here remains unchanged. That makes recent weakness in PLUG stock look like a compelling buying opportunity for those who believe in HFC tech.
Plug Power Is a Pure Play on HFC
The best way to look at Plug Power stock is as a pure play on commercial and consumer adoption of HFC tech in the auto market.
Zooming out, the whole auto world is pivoting from traditional fuel sources to alternative fuel sources. This transformation has huge momentum right now, and will sustain that movement for the foreseeable future as governments and consumers globally work together to reduce carbon emissions.
At present, electric batteries are the only well-known and widely available alternative fuel source. That’s why we have seen electric battery car makers like Tesla (NASDAQ:TSLA) make a huge dent in the traditional auto market, and turn into multi-billion dollar auto giants.
However, at scale, it is unlikely that electric batteries remain the only alternative fuel source. Instead, it is far more likely that there will be alternatives for consumers who want to switch away from diesel, but don’t like some of the inherent disadvantages of electric batteries; Namely, short ranges and long re-charge times. HFC tech is one such alternative fuel sources which addresses those disadvantages.
Will those two advantages convince everyone to pivot from electric cars to hydrogen cars? No. Far from it. But it will convince enough consumers to make this a sustainable market with sizable demand.
Right now, the HFC market is essentially a non-existent one. Thus, over the next several years, the HFC market has a huge opportunity to go from essentially zero, to something much bigger. If that transformation materializes, PLUG stock should head way higher in the long run.
Plug Power Stock Could Hit $8
The numbers here work out so that if HFCs do gain some mainstream traction over the next several years, Plug Power stock could run towards $8 within the next several years.
Plug Power management has laid out intentions to grow revenues to $1 billion and adjusted EBITDA to $200 million within the next five years. Those are aggressive targets, as revenues this year are expected to be just $220 million. If that is the case, adjusted EBITDA will be barely positive.
From that perspective, it’s easy to look at management’s growth targets and call them overly ambitious. They may be, but HFC tech is just now coming into its own — and in the forklift world alone, Plug Power has a $30 billion opportunity. Thus, Plug Power really does appear to be in the very early stages of exponential growth, as the company deploys more and more fuel cell systems across the materials-handling industry.
Margins are already rapidly improving, and should continue to this trend with increasing scale. Additionally, an adjusted EBITDA loss a year ago flipped to a profit last quarter.
Collectively, Plug Power’s five-year targets seem ambitious, but also achievable. Assuming they do hit those targets, then my modeling suggests that Plug Power could hit 50 cents in earnings per share by 2025. Based on a market-average 16-times forward earnings multiple, that equates to a 2023 price target for PLUG stock of $8.
Bottom Line on PLUG Stock
Plug Power stock is a high-risk, high-reward bet on continued uptake of HFC technology in the commercial and consumer auto markets. This stock is not for risk-adverse investors. But, for risk-seeking investors, recent weakness presents an interesting buying opportunity into a stock that could be a multi-bagger over the next few years.
As of this writing, Luke Lango was long TSLA.
