In September, Plug Power (NASDAQ:PLUG) released its five-year plan, which projected annual revenue of $1 billion by 2024. With PLUG stock below $3 at the time, it was clear that investors simply didn’t believe Plug Power would hit that target.
After all, management was guiding not only for $1 billion in revenue, but big profits. A targeted $170 million in operating income suggested adjusted earnings per share of at least 45 cents.
I estimated at the time that hitting those targets would move the PLUG stock price to between $7 and $9. On this site, Luke Lango argued that even if Plug Power’s performance disappointed, present fair value was closer to $4.
In the five months since, Plug Power has executed well toward that target. Initial guidance for 2020 looks solid. Investor confidence in those targets — or, at least, Plug Power’s future — has steadily increased.
But so has the PLUG stock price, which now sits over $5 at this writing. Shares have rallied some 86% since the five-year plan was released. That price, and that rally, suggest potential caution toward PLUG stock — even for investors bullish on longer-term performance.
Plug Power Drives Confidence
To oversimplify the situation, what has driven the recent rally in PLUG is increasing confidence in those targets. Again, when Plug Power released the long-term plan on Sept. 18, shares closed at $2.82, having gained 3.7% that day.
Yet the targets suggested that the stock could triple in roughly five years from that closing price. The price itself showed that investors simply didn’t believe Plug Power would deliver.
That was a logical expectation — and it still might be. After all, Plug Power has been a serial disappointer. Incredibly, as Bloomberg noted last year, it took the company 20 years just to post positive Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in a single quarter.
Plug Power has raised — and burned — well over $1 billion in capital during its history. At the end of the third quarter, Plug Power’s accumulated deficit was $1.33 billion.
Meanwhile, the five-year targets haven’t changed. In fact, Plug Power reiterated those targets in a business update given on Jan. 30.
Progress in 2019 and 2020
What has changed is that investors are pricing in an increasing probability of Plug Power hitting those targets, or at least getting close. And that makes some sense.
The business update in late January suggests Plug Power will hit its 2019 guidance. The outlook for 2020 includes Adjusted EBITDA of roughly $20 million, a nice year-over-year improvement, on the back of billings growth that will exceed 25%. (Billings are calculated as revenue plus the net change in deferred revenue; essentially, the amount of business brought in during 2020, even if some of that business won’t be recognized as revenue until later years.)
A $172 million order announced in early January is a nice step toward the company’s targets. Even though it appears the order is from an existing customer — likely Amazon (NASDAQ:AMZN) or Walmart (NYSE:WMT), both of which own PLUG stock as well — it’s still a solid win and a big contract. It alone suggests annual billings of at least $86 million, a material part of the $1 billion Plug Power hopes to reach by 2024.
As the confidence in the 2024 targets increases, so should the PLUG stock price. That’s exactly what’s happening. It’s somewhat reminiscent of the gains in Advanced Micro Devices (NASDAQ:AMD).
That company was a serial disappointer: at 2016 lows, the stock had fallen over 95% in roughly ten years. Investors there expected more of the same, but as its turnaround took hold, and new products took share, AMD stock took off. As long as Plug Power can keep converting skeptics, its stock, too, can rise.
The Concerning PLUG Stock Price
The one concern at the moment, however, is just how much confidence has been priced in by the 86% rally since September, let alone the 311% rise since the beginning of last year.
Again, even Plug Power’s targets suggest $200 million in Adjusted EBITDA and maybe 50 cents in adjusted EPS. A 20x enterprise value to EBITDA multiple and a 25x price-to-earnings multiple might get the stock to $11-$12 in 2024. After all, growth doesn’t necessarily end when and if the targets are reached.
But even those targets suggest the upside in PLUG at the least is getting a bit thinner. A stock that in September had a path to tripling in four and a half or five years now, in a bullish scenario, maybe doubles in four years. That latter performance is attractive, but it’s also not guaranteed.
After all, Plug Power still needs another big customer win beyond Amazon, Walmart, and Procter & Gamble (NYSE:PG). There’s still a long way to go from the projected $300 million-plus in 2020 billings to the $1 billion in 2024 revenue.
Watch the Risk
In other words, risk remains. The company’s history can’t be ignored even amid improving performance. And yet PLUG, above $5, is pricing in much more success, and much less risk, than it did six months ago or thirteen months ago.
That alone isn’t a reason to sell PLUG stock after the rally. It’s definitely not a reason to short the stock. But price matters, and the current price does change the story. I’ve been bullish on PLUG stock going back to last year because the upside was so huge. And as Lango noted last year, even missed targets suggested strong upside in the stock.
Above $5, neither necessarily is the case. The upside is attractive, but not what it was last year. If Plug Power misses its targets, shares stall out or potentially decline from these levels.
Given the company’s inability over two decades to drive consistent cash flow, this always was a high-risk, high-reward story. Investors have responded to the fact that recent performance has reduced the risk. They should also remember that the higher price reduces the reward.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.