Is Plug Power (NASDAQ:PLUG) stock unstoppable? Since Feb. 14 alone, shares in the hydrogen fuel cell company have rallied nearly 20% — and currently, PLUG stock is trading for more than $5 per share. On the heels of Tesla (NASDAQ:TSLA), the market is buoyant on what InvestorPlace contributor Ian Bezek calls “the big green energy wave.”
However, as shares head northward to prior year highs, are we reaching the top? Plug Power bears, such as myself, have been proven wrong in the past year. Based on the current trajectory of PLUG stock, it’s definitely possible shares could hit $8 per share and beyond as they did in 2014.
Nevertheless, as strange as it may seem, now may be the time to sell PLUG stock. With hype going parabolic, Plug Power shares are “priced for perfection.” While new developments could mean more upside, fundamental flaws to the company’s business model persist.
So, let’s dive in and see why the time is right to start going bearish on PLUG stock.
Is Plug Stock Headed to $8 and Beyond?
As mentioned above, PLUG stock is fast reaching highs it last set in the mid-2010s. But, as the bulls like to say, “it’s different this time”.
While in most cases that’s a precursor to a bubble pop, I concede this time the bulls could be right. Large companies left and right are looking to “go green”. For businesses with large warehouse operations, moving to forklifts powered by alternative energy looks like a smart move.
Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT) and others agree. They already use Plug Power’s GenDrive products in their warehouse operations. Based on InvestorPlace contributor Larry Ramer’s Feb. 4 PLUG stock article, there are other needle-moving catalysts in the pipeline. Namely fuel cell-powered passenger and commercial vehicles.
Along with continued strength in the company’s material handling sales (forklifts), it’s possible the company hits their ambitious 2024 goals of $1 billion in revenue, and $200 million in adjusted EBITDA. With that, each step closer to this target could send PLUG stock to even further highs.
But, what’s the catch? What are speculators ignoring as they bid up PLUG stock? While there could be a “new paradigm” with regards to hydrogen fuel cell adoption, there’s red flags aplenty that could eventually catch up with the company.
Key Red Flags for PLUG Stock
In past analysis, I’ve harped on the capital structure of PLUG stock. At first glance, it’s impressive Plug Power signed on big names like Amazon and Walmart. But, these deals came at a price. In both transactions, Plug Power issued warrants to the retail giants, in exchange for their business.
Additionally, dilution is part and parcel to the Plug Power story. After last fall’s stock offering, there’s now around 291.8 million shares of PLUG stock outstanding. But per the last quarterly filing, there’s 217.9 million shares of dilutive potential common stock. This alone should concern investors.
Yet, this is not the biggest red flag. In December, Spruce Point Management — who is short Plug Power stock — released a detailed report making the bear case for the PLUG stock. A key element of their case is the company’s aggressive use of expanded lease financing. In other words, instead of customers buying Plug Power products — then entering a sale/leaseback agreement with a third-party financing company — they are leasing the equipment directly from Plug Power. Then, PLUG finances the deal via a sale/leaseback with a third-party.
In Spruce Point’s opinion, this financing is unsustainable. Plug Power is running out of capacity to enter such transactions, and may require additional dilution in order to sustain growth. I agree with this assessment. Plug Power could be a house of cards, stumbling if and when the music stops.
The question is, “how far will it go?” When Spruce Point released this report, PLUG stock traded for just under $3 per share. With shares essentially doubling since then, though, it could be easy to dismiss Spruce Point’s bearish claims. Yet, the recent bubble could turn on a dime — sending shares lower as reality conflicts with speculation.
Bottom Line on PLUG Stock
I don’t deny that PLUG stock could head higher. As the bubble continues in “new paradigm” stocks, it’s tough to go contrarian. But, as Plug Power shares closely reach past highs, now may be the perfect opportunity to sell. The company does have big potential, as large companies look to “go green”.
Yet, as seen from Plug Power’s vendor financing strategy, customers hold the upper hand. In order to make big sales, Plug Power has to assume the role of the lessor, leveraging its balance sheet via third-party sale/leaseback agreements. If the company is no longer able to employ this strategy, Plug Power will need to engage in more shareholder dilution in order to keep the growth train humming.
So, despite shares going parabolic, now’s the time to sell PLUG stock.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.