The stock hit a 52-week and all-time high of $10.49 on July 6. In the six days of trading since it has fallen back 21%. I guess investors felt Plug Power stock was getting ahead of itself from a valuation perspective.
In April, I was enthusiastic about the company’s drive to $1 billion in sales by 2024, suggesting it was a buy in the mid-$3s and a steal under $3. Now that it’s pushing $10, it’s not nearly as cheap.
Despite its lofty valuation, I still believe it’s a buy. Here’s why.
Plug Power’s Lofty Goals Got Loftier
In April, Plug Power announced a five-year plan that included $1 billion in sales, $170 million in operating income, and $200 million in adjusted EBITDA by 2024. On June 23, the company raised its goals for 2024 to $1.2 billion in sales, $210 million in operating income, and $250 million in adjusted EBITDA, 17%, 24% and 25% increases, respectively, from its earlier targets.
Acquisitions were the main reason for the increase.
The first was United Hydrogen, one of the largest privately-owned hydrogen producers in North America. It currently can produce 6.4 tons of hydrogen daily. It will up that amount to 10 tons daily soon. Having United Hydrogen in the fold helps Plug Power keep up with the push to hydrogen fuel.
The second acquisition was Giner ELX, an operator of one of the world’s largest and most cost-effective proton exchange membrane (PEM) hydrogen generators.
As someone who had trouble with science in high school, I’ll leave the importance of such a generator to the professionals.
“Water electrolysis technologies are classified into three categories based on the applied electrolyte: alkaline water electrolysis, proton exchange membrane (PEM) water electrolysis, and solid oxide water electrolysis ,” stated authors Radenka Maric and Haoran Yu in a November 2018 journal contribution for IntechOpen.
“PEM water electrolysis systems provide several advantages over the other two electrolysis technologies, such as higher rate of hydrogen production, more compact design, and greater energy efficiency.”
In a nutshell, Giner ELX gives Plug Power access to greener hydrogen, which will allow it to move its customers to low carbon and zero-carbon energy solutions.
Plug Power’s intention is to become a vertically-integrated hydrogen company. These two acquisitions have moved it closer to its goal to have 50% or more of the hydrogen used in its business to be green by 2024.
“Plug Power is working to build the modern clean hydrogen economy. Every decision we make is with an eye to the future, not the past,” Plug Power CEO, Andy Marsh, said in its press release announcing closing the two acquisitions.
“This closely aligns with the efforts that companies like United Hydrogen and Giner ELX have made to secure broad participation in the hydrogen economy, and to achieve the objectives of a clean environment and reduced dependence on foreign oil.”
Any business that can help drive fossil fuels into oblivion is worthy of investor attention. Plug Power is undoubtedly one of them.
Why Buy PLUG Stock at 9 Times Sales?
Plug Power reported its first-quarter results in May. On the top line, sales were $40.8 million, 88.9% higher than a year earlier. On the bottom line, it had adjusted EBITDA of $6.1 million, 30.7% lower than Q1 2019. On a GAAP basis, it lost 12 cents per share, 14% lower than last year.
All around, the numbers were very encouraging.
Despite the novel coronavirus and Covid-19, it closed a multi-site anchor GenKey customer with estimated gross billings, of approximately $50 million during the quarter. Also, it launched its 125kW Pro-Gen zero-emission engine for heavy-duty Class 6, 7, and 8 trucks, transit buses, etc.
Equally important, it reaffirmed its 2020 guidance of $300 million in gross billings, a growth rate of more than 25%. This is a business on the move.
“Hydrogen is expected to be one of the fastest growing segments of the energy industry representing as much as 18% of the energy mix by 2050. Today, Plug Power is the largest user of liquid hydrogen and has built more hydrogen refueling stations than anyone else in the world,” stated its Q1 2020 letter to shareholders.
“Customers have performed more than 27.7 million fills, dispensing more than 27 tons of hydrogen daily. These numbers remain unmatched by any other company in our industry.”
I believe that it makes sense to pay up for companies that are breaking the mold. Plug Power is such a company.
Next stop, $20. The only question is when? Sooner than you think.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.