After last month’s epic rally, what’s next for Plug Power (NASDAQ:PLUG) stock? It depends. On one hand, things may just be getting started for the budding HFC (hydrogen fuel cell) giant. Government mandates and cost savings potential could mean accelerated demand for the company’s HFC technology.
On the other hand, you can argue that the rising tide of Tesla (NASDAQ:TSLA) stock is what’s lifted Plug’s boat. Exuberance for the EV (electric vehicle) giant’s shares has fueled speculation in other EV stocks, like Nio (NYSE:NIO) and Nikola (NASDAQ:NKLA).
This “EV fever” has spilled over into other alternative energy names, like PLUG stock. With this in mind, it’s no wonder shares have performed so well as of late.
Yet, the speculation fueling its strong performance may be ending. After its blockbuster quarter, investors are cashing out of Tesla. The other EV names are pulling back as well. Plug Power itself has seen its shares take a dip, falling from double-digits back to around $7.75 per share.
The sell-off may not be over. As investors realize this “story stock” has a long way to go before it’s truly ready for prime time, chances are shares continue to tumble back to prior price levels. In short, plenty of reason to steer clear for now.
Bull Case vs. Bear Case for PLUG Stock
Before laying out the bear case, I’ll concede there’s a solid bull case for Plug Power stock. On July 15, InvestorPlace’s Larry Ramer broke it down: firstly, HFC-powered forklifts are cheaper to run than battery-powered forklifts. With e-commerce accelerating, retailers are expanding their warehouse operations.
Secondly, mandates for zero-emission trucks will fuel demand for Plug’s technology among truck manufacturers. There’s ample evidence fuel cells are a superior eco-friendly energy source for trucks than electric batteries.
While these factors could mean continued success for the company, it doesn’t necessarily mean PLUG stock is destined to head higher. Why? These main catalysts are already factored into the company’s share price.
At least, that’s the take of Barclay’s analyst Moses Sutton. Earlier this month, Sutton downgraded the company’s shares from “buy” to the equivalent of “hold.” His rationale? After the rapid rise in shares, much of the company’s tailwinds “look priced in.”
Running the numbers, this checks out. How so? Let’s take Plug Power’s current 2024 profitability projections and assign a valuation. Discounting it back to 2020, we can determine a reasonable valuation.
Four years out, Plug estimates it’ll generate $250 million per year in adjusted EBITDA.
Assigning an aggressive EBITDA multiple (15x) to the 2024 numbers, we get a valuation of around $3.2 billion (after backing out Plug’s $544 million in debt and finance obligations). Discounting that (8.5% per year) back to now, that leaves us with a present value around $2.3 billion, versus today’s $2.6 billion market cap.
In other words, shares are overpriced considering their potential future value. But that’s not all. With other red flags at play, there’s more than valuation concerns backing up the bear case for PLUG stock.
Beyond Valuation, Other Concerns At Play
Granted, it’s not the best move to go against a stock on valuation alone. A richly-priced stock can easily remain overvalued. As long as its “story” still wins over the hearts and minds of investors.
But, there are other factors at play that could change Wall Street’s tune. For one, massive dilution. Per the latest quarterly filing, there’s 196.8 million “dilutive potential shares” outstanding. In other words, warrants, options, debt, and preferred stock that could be converted into common shares.
By comparison, the company currently has 309 million outstanding shares. In short, the stock’s risk/return proposition may diminish when the company turns these convertible securities into common stock.
Also, as our own Mark Hake discussed July 8, you can poke many holes into Plug’s much-touted growth projections. Plug Power has a history of failing to deliver on big promises. Investors should take management’s current touting with a grain of salt.
Finally, don’t ignore the company’s precarious use of vendor financing. So far, this growth tactic has paid off, but it’s debatable whether the company can keep leaning on it to facilitate its growth.
As Speculators Cash Out, It’s Time to Sell PLUG Stock
So far this year, ignoring Plug Power’s bears has been a winning move. Year-to-date, the stock has rallied nearly 163%. But, as “EV fever” cools down and investors cash out of “green wave” stocks like this one, it’s high time to follow suit.
With upside priced-in, it doesn’t look worthwhile buying PLUG stock at today’s prices. And with red flags abound, there’s plenty of reason why shares could tumble back to prior price levels.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.