On Feb. 20, Plug Power (NASDAQ:PLUG) stock hit a new 52-week high at $6.05. The last time PLUG stock went over $6 was in 2014. So, as volatility in the markets increases, investors are now wondering whether they should still buy into the shares of the hydrogen fuel cell maker at these levels.
The group is expected to report its fourth-quarter earnings in the coming days. The Street was not fully impressed with the previous quarter’s results, and as a momentum stock, the price tends to be choppy around earnings dates. Therefore, I’d wait to analyze the quarterly results before hitting the buy button. If you are already an investor, though, you may consider ringing the cash register at these levels prior to the earnings.
Growing Pains of the Hydrogen Fuel Cell Technology
Before I discuss the company’s most recent earnings and what to expect in Q4, I’d like to introduce the industry Plug Power operates in so that especially new investors may better appreciate the market.
A fuel cell generates electricity by a chemical reaction. And according to the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy (EERE), “a fuel cell uses the chemical energy of hydrogen or another fuel to cleanly and efficiently produce electricity. If hydrogen is the fuel, electricity, water, and heat are the only products.” That said, many believe that fuel cells may offer the prospect of supplying the world with clean, sustainable electrical power.
However, long-term investors in Plug Power would also know how volatile hydrogen fuel cell technology has been in the past decade. In other words, it is still experiencing growing pains.
Overall, the share price of the company as well as others in the sector tend to reflect this reality. After a dismal 2018, however, PLUG stock had an impressive rally. Over the past twelve months, the price is up over 180%.
Material handling industry — like forklifts — is the company’s core market where it is the leader across North America. Its fuel cells are an alternative to lead-acid batteries, and the group specializes in technology that uses hydrogen as fuel for vehicles both small (warehouse forklifts) and large (delivery vans and airport safety equipment).
Plug Power’s Q3 Results Were Mixed
On Nov. 7, 2019, the provider of hydrogen engines and fueling solutions released Q3 earnings.
It posted revenues of $56.38 million for the quarter ended September 2019, which meant about a 6% year-over-year increase. The company also met earnings expectations by with the 8 cents adjusted loss per share.
Moreover, the company lost $13.2 million in Q3. Many investors are quite concerned that Plug Power which has been around for more than two decades is still unprofitable and cash flow negative. Its debt levels are also on the rise, and in September 2019, it issued a $40 million senior convertible note at a 7.5% interest rate.
So, how much longer can this cash burn go on?
Since then, management has announced another material handling contract with an unnamed Fortune 100 company. And following the trading update, PLUG stock jumped about 15%. In other words, the bulls are happy to note the success in sales.
During the quarterly release, management also affirmed full-year projections, including the $235-$245 million annual revenue target. Therefore, investors would now like to see that there are no unexpected surprises in the Q4 report.
Following the earnings result, Craig Irwin of Roth Capital upgraded the company from “neutral” to “buy” He also increased the price target from $3 to $6. The shares are now hovering around $5.5. The current average price target stands at about $4.60.
So is PLUG Stock A Buy Now?
From a fundamental analysis perspective, I’d not be a buyer of PLUG stock at current levels. That is, unless I were a risk taker.
Therefore, I’d encourage potential investors to do due diligence and think hard whether their portfolios can handle a company that is not likely to report any kind of substantial or consistent profits any time soon.
If you are an investor who also follows technical charts, you may be interested to know that due to the price increase over the past year — but also so far in 2020 — short-term charts are overbought and signalling caution. Year-to-date, PLUG stock is up an eye-popping 59%.
Especially, if the markets becomes volatile with a downward bias in the coming days, there will likely be short-term profit-taking in PLUG shares. If you already hold the stock, you may want to realize some of your paper profits.
Alternatively, if you are experienced in hedging with options, you may want to initiate a March 20 ATM or ITM covered call position. Such a hedge would offer some downside protection. Depending on your chosen strike, it may enable you to participate in a potential up move too.
Yet, if you’re bullish on hydrogen as well as alternative energy, and would like to have exposure to Plug Power in your holdings, you may consider buying into an ETF such as the Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW), the iShares Global Clean Energy ETF (NASDAQ:ICLN) or the SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL).
On a final note, as the hydrogen fuel cell industry gains more recognition, the company may find itself as a candidate to be acquired.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.