Shares in Plug Power (NASDAQ:PLUG) are up 27% on the year but you can wait on the big gains.
Plug Power makes fuel cells, which combine hydrogen with oxygen from the air to produce energy. Water is the byproduct. Unlike FuelCell Energy (NASDAQ:FCEL), which sells its engines to utilities for back-up power, Plug Power focuses on warehousing. Forklifts with fuel cells can go all day without being refueled.
Plug Power is now trying to expand this niche by getting into trucks, with advanced diagnostics that let owners track them.
The focus is on the “middle mile,” deliveries made between warehouses, with hydrogen stored at the warehouses for easy refueling.
Too Early or Too Late
It’s all part of a five-year plan, which the company insisted in its March 5 earnings release is on track. But a loss of 6 cents per share, albeit on revenue of over $91 million, sent shares down anyway.
Before earnings, InvestorPlace analyst Louis Navellier was calling the stock “unstoppable.” Over the long run that might be the case.
But with fossil fuel energy costs falling, and the prospect of a global recession, the near term looks dicey. That’s why InvestorPlace’s Larry Ramer wrote on March 2 that investors should wait until after coronavirus fears subside to buy the stock. He wrote after taking profits on two months that saw the price move from $3.23 per share to over $5.
My own view is that these are early days for Plug Power. Plug Power has been touting the idea of using electrolysis, powered by solar or wind energy, to produce hydrogen. But for now, the primary feedstock remains natural gas. While natural gas is cheap and plentiful, burning it is a cheaper way to use it. Fuel cells aren’t quite as green as they seem.
An Established Niche
The best news for Plug Power is that it has established a niche for itself in warehousing. Cleaner operations, lower maintenance costs and shorter fueling times all working to its benefit.
The problem for small investors is that its customers could be its undoing. Under a 2017 sales agreement, Amazon (NASDAQ:AMZN) won the right to buy up to 23% of Plug Power if its total orders came to $600 million. Such a move would water down the holdings of existing shareholders.
Walmart (NYSE:WMT) is another big customer for hydrogen-powered forklifts. It was estimated in 2018 there were already over 20,000 hydrogen-powered forklifts in operation.
Going from warehouses to the streets may be tougher. Here, fuel cells must compete directly with natural gas. United Parcel Service (NYSE:UPS) is a big user of natural gas in its delivery vehicles, and those moving between warehouses would be of the same class. Hydrogen is also harder to store than natural gas.
While natural gas is a fossil fuel it’s often sold as “clean” energy, because it offers lower emissions than oil. The industry works around critics by taking some of its gas from landfills, calling this “renewable.” Fuel Cell Energy also uses landfill gas to power its fuel cells.
The Bottom Line on PLUG Stock
Plug Power is doing much better than other energy or transportation stocks in 2020. The shares fell 9% on March 9 but recovered nearly all that loss overnight, opening at $4.15. Plug Power’s market capitalization is about $1.2 billion, on trailing year sales of about $200 million.
It means that, for now, the stock is fully valued. This is a speculative stock for younger investors. It could be a 10-bagger, increasing in value by 10 times, assuming the company’s five-year plan works. For now that’s still just an assumption.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
