For investors of Plug Power (NASDAQ:PLUG) the last year has been rewarding. During this period, PLUG stock has skyrocketed by 202%.
I have maintained a “cautious” outlook on Plug Power in my last two columns. In my view, the first reason to be cautious is the relatively slow adoption of the hydrogen fuel cell.
The second key reason was management promises in the past that have not lived up to expectations. There are further concerns that make me remain cautious and avoid Plug stock. At best, a small speculative exposure can be considered.
I expected Plug stock to trend lower in the beginning of 2020. In December, the company announced a 40 million share offering at $2.75 and I believed equity dilution would have more downside.
However, Plug announced a new $172 million contract in January and that has taken the stock higher. I do expect some correction after the big rally. Therefore, even for investors who are bullish, I recommend near-term profit booking.
Management Concerns
A recent report by Spruce Point Capital Management highlights several concerns that are strong reasons to remain cautious.
According to the report, the management is “non-credible” and has been providing “unrealistic” targets.
A good example is the company’s target revenue of $1 billion by 2024. Based on third-quarter 2019 results, Plug is positioned to report annual revenue of $176 million. To increase revenue to $1 billion, Plug needs to grow at an annual rate of 41.60% over the next five years.
For Q3 2019, Plug reported revenue growth of 6.0% on a year-on-year basis. I would wait for a few quarters to see how the company can accelerate revenue growth from 6.0% to over 40.0%.
Of course, the recent contract of $172 million helps but is too small considering the company’s ambitious growth target. It is also worth noting that the backlog will be spread over the next few years. Therefore, Plug should ideally see sharp growth in order intake in 2020 and beyond.
It is worth noting that Plug reported positive EBITDA in the last two quarters. However, Spruce Point Capital report opines that positive EBITDA is a result of a new lease accounting standard adopted in 2018. The company has added back gross profit on operating leaseback arrangements, which has boosted the EBITDA.
Related to this, Spruce Point Capital also notes that whenever the company has expanded the operating leasebacks, it has translated into top-line growth. Therefore, Plug providing lease financial directly to customers has helped in growth. At the same time, the balance sheet restricted cash has swelled to $155 million as of Q3 2019.
I would look for growth acceleration without expanded operating leasebacks. The coming quarters will provide some insights on potential development on that front.
Market Growth Likely to Remain Slow
Considering the revenue target for 2024, Plug should see top-line growth of 40% to 45% in the next five years. However, the hydrogen fuel cell vehicle market is expected to grow at a CAGR of 8.12% from 2019-2023.
Therefore, the growth expected by Plug is significantly above the expected industry growth. Management needs to provide a road map on how this growth is likely to be achieved.
Plug does talk about a total addressable market of $30 billion in the material handling segment. In addition, the company believes that there is a TAM of $200 billion in the electric vehicle segment. It remains to be seen if the TAM can translate into healthy top-line growth.
My Final Words on Plug Stock
Lack of confidence in management is one of the primary reasons to remain cautious. Further, growth backed by operating leasebacks is a concern. I believe that 2020 will provide investors with a clear direction based on the top-line and EBITDA growth. Order intake also needs to accelerate if 40% plus growth has to be achieved.
Therefore, with so many uncertainties, it makes sense to remain in the sidelines. The stock has also surged by 202% in the last one year and profit booking is likely. Considering these factors, I maintain a neutral to a negative view on the stock.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
