The financial world has focused heavily on Tesla (NASDAQ:TSLA) over the past few weeks. Tesla stock ran up from $400 at the start of the year to as high as $986 per share earlier this month.
That sort of move by the shares of a high-profile company has attracted all sorts of attention. Not surprisingly, traders have rushed to buy the shares of other companies that could ride the big green energy wave. Plug Power (NASDAQ:PLUG) has been one such company; it’s not a coincidence that PLUG stock reached new 52-week highs as Tesla shares went exponentially higher.
But does Plug Power deserve to be rallying together with Tesla? Their businesses aren’t really that similar. And Plug Power has had a far less promising track record as a public company than Tesla.
Plug Power could eventually succeed. But traders who are buying PLUG stock because they think it’s the next hot name should do a little more research before snapping up too many shares.
A Promising Story
Plug Power’s CEO Andy Marsh offers investors an appealing narrative. During the company’s business update, held at the end of January, he made a reasonable argument. He cited McKinsey’s data which suggests that, over time, hydrogen could make up 18% of the world’s energy supply. Marsh states that, over time, fuel cells could replace batteries in a variety of applications such as taxis, moving beyond just the extremely niche markets that they currently serve.
That’s all great, but it will take years, if not decades, for such mass adoption to occur. However, Marsh discussed more immediate, concrete positive catalysts as well. For one thing, the company is on pace to report positive annual EBITDA for the first time. That’s still a far cry from generating bottom-line profits or positive cash flow, but it’s a solid milestone nonetheless.
Don’t Expect Quick Results
It’s great that Plug Power is poised to achieve at least break-even EBITDA. Unfortunately, given Plug’s challenging balance sheet situation, some of the items excluded by EBITDA – such as interest – remain problematic for it. In 2016, 2017, and 2018, the company reported net income losses of $58 million, $130 million, and $78 million, respectively.
Those losses are meaningful on their own. Add the company’s losses since it was founded, and they get breathtaking. As of the end of 2018, Plug Power had an accumulated deficit of $1.3 billion. That’s its combined losses since it was founded back in 1997. So, we’re coming up on a quarter century of anemic results from the firm.
The company’s cash flow situation also remains troubling. Over the past 12 months, Plug Power’s operations have burned $68 million of cash. Not surprisingly, the company went to the secondary market after its stock price went up last quarter, raising $110 million through an offering that greatly reduced the value of its existing shares. Those funds will likely last less than two years if its cash burn continues at last year’s rates.
Anyone who has bought PLUG stock over the decades on the hope of an imminent, positive turning point has gotten badly burned; until the company starts producing consistent cash flow and profits, shareholders will face a bumpy ride.
Plug Power Isn’t Tesla
Plug Power CEO Andy Marsh openly compares Tesla to PLUG himself. During the recent business update, in fact, Marsh suggested that Plug Power was the Tesla of the hydrogen industry.
Responding to a question about whether Plug Power would specialize in certain niches within hydrogen or continue working across the entire industry, Marsh said that:
“I think a lot of what we’re doing here is a lot like Tesla. Tesla had to figure out the charging stations, how to deliver a complete solution to the customers, how to disrupt the channels. And I actually think the winner in the next generation of hydrogen and fuel cells may not be the big names. I mean, just like in solar, the big winner in solar wasn’t GE (NYSE:GE). There is a lot of other people. And I think that for the foreseeable future to really keep this market accelerating, it’s going to be for people like Plug to provide end-to-end solutions.
To an extent, Tesla’s efforts to re-make the auto industry from the ground up have worked. And certainly its stock has been a roaring success. However, TSLA CEO Elon Musk had far more access to resources and press coverage than Marsh does. Musk has also pushed the envelope to move Tesla forward.
It’s cool to think about Tesla and imagine building a similar company in another emerging industry, such as hydrogen in this case. But realize hydrogen fuel cells are much more of a niche industry than automobiles, and Plug Power doesn’t have a star like Musk to attract funds and free media coverage.
Furthermore, the window of opportunity doesn’t always last forever. Tesla stock started trading in 2010 and had already soared 1000% by the end of 2013. Plug Power, on the other hand, debuted around 20 years ago and has consistently destroyed shareholder value.
The Verdict on Plug Stock
Within the past year, PLUG stock traded for as little as $1.32 per share. So beware its current share price above $4. Given Plug Power’s long history of losing money and endlessly lowering the value of its shares by offering new stock, it’s generally been a wise trade to take profits on any significant advances by Plug Power’s stock.
Since the recent gains by Plug Power have likely been caused by Tesla’s gains, there’s a good chance that Plug’s move will fade now that Tesla has lost some momentum.
It’s fun to speculate on a stock like PLUG when the sector is flying. But the company’s own performance provides little evidence to back up Plug’s stock price. Its book value per share is in negative territory. Its price/sales ratio of 6.66 is much too high for a money-losing, low margin business like PLUG’s.
And with analysts, on average, predicting that Plug Power will lose tens of millions of dollars again next year, expect more stock offerings and financial difficulties from PLUG in the coming months and years.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
