As the old adage puts it, the most dangerous words in investing are, “this time is different.” For years, that wisdom would have steered investors away from Plug Power (NASDAQ:PLUG) stock.
After all, Plug Power has been one of the market’s longest-running serial disappointers. Since inception, Plug Power has accumulated a deficit over $1.3 billion. Financial targets have been missed repeatedly. Shareholders have been diluted in a constant effort to raise funds: Plug Power had 43 million shares outstanding at the end of 2000, but the count will close this year at over 300 million.
Yet the story slowly has changed in the past few quarters — and for the better. PLUG stock has responded in kind, gaining 173% over the past twelve months. With more good news coming from the company this month, there’s increasingly a case that this time actually is different. That in turn means that Plug Power stock should have more room to run.
In December, it did look like Plug Power might be ready to disappoint investors once again. A five-year plan released in September targeted $1 billion in revenue and Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $200 million.
I estimated at the time those targets suggested fair value of at least $7. My colleague Luke Lango argued that even missing the targets suggested PLUG stock could get to $4. Investors clearly agreed with the bull case: PLUG climbed from barely $2 at the beginning of September to $4 at the end of November.
Then the bottom fell out. On Dec. 2, Plug Power announced a stock offering of 40 million shares. Plug stock dropped 11% on the news, and kept falling, returning to below $3 within a matter of weeks.
It wasn’t hard to see why. It certainly looked like Plug Power had taken advantage of the rally to sell shares at possibly inflated prices. The offering wound up being priced at $2.75, a sharp discount that suggested institutional investors weren’t interested in paying up for the stock.
The reaction to the offering seemed to be something along the lines of “same old, same old.” This is a stock that has made huge moves before. Most notably, in 2013, Plug Power stock went from seemingly near bankruptcy to over $9 in roughly a year. Those gains, like so many before, quickly faded. And the obvious worry just a month ago was that the 2019 rally was headed for a similar fate.
PLUG Stock Rallies
But the ‘new’ Plug Power re-emerged in time. The company announced last week that it had received a two-year contract worth $172 million. The unnamed customer is a member of the Fortune 100, which adds to a customer list that includes Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), and Procter & Gamble (NYSE:PG).
The win with such a large company is the first Plug Power has generated since 2017, when an expanded partnership with Walmart sent PLUG stock soaring. And it is a big win: the average annual contract value of $86 million or so is over one-third of expected 2019 revenue. It’s a nice step toward the aforementioned $1 billion target as well.
It’s not yet clear who the customer is, though one analyst believes it’s likely a “multi-site” retailer, with Home Depot (NYSE:HD), Lowe’s Companies (NYSE:LOW), and Kroger (NYSE:KR) among the possibilities. Regardless, the win is another step toward Plug Power’s long-term targets and towards increased adoption of the company’s technology.
The deal has another benefit: it changes the perception of December’s stock offering. Dilution isn’t helpful, to be sure, and the price still looks a bit disappointing in the context of recent trading. (I had thought Plug Power could get at least $3 per share, even assuming a discount to recent trading, and one wonders if the company could have received a better deal by waiting until this agreement was announced.)
That said, the balance sheet might be finally firmed up at this point. The $120 million raised (net of fees, and with exercise of the underwriters’ allotment) should cover cash burn for the foreseeable future. Plug Power has burned a bit over $70 million in the last twelve months, but that burn will come down as growth continues in 2020 and beyond. The hope at this point is that dilution finally is at an end — which unquestionably would be good news for investors.
The Story Still Holds
After the past few weeks, the story with Plug Power stock really isn’t all that different. Yes, shares have risen 173%. But the company’s execution in recent quarters, the improved balance sheet, and the big win all have ‘de-risked’ the story. PLUG stock should be rising as confidence toward its future grows.
And so the case is much the same as it was back in May: as long as Plug Power keeps delivering, its stock is going to continue to rise. I still believe this is a stock that can double in 4-5 years if targets are hit, or if the company comes close. The big contract win this month is yet another step in the right direction, and a step toward remaking the deservedly poor reputation of Plug Power with investors. As long as more steps follow, so will upside in PLUG stock.
As of this writing, Vince Martin has no positions in any securities mentioned.