There are two contradictory trends at play when it comes to Plug Power (NASDAQ:PLUG) stock. The good news is that in the market of recent years, stories like Plug Power generally have played out well. Investors have paid ever-higher prices for businesses benefiting from secular growth, and generally ignored valuation concerns in the process.
The bad news is that PLUG stock itself has been here before — and those rallies have not played out well at all.
In late 2010, the stock doubled; the gains were gone in months. By 2013, Plug Power seemed destined for bankruptcy, and shares traded near zero. The stock promptly rallied to $7 in a little over year and dropped below $2 less than two years later. In 2017, the stock almost doubled, and gave back almost all of the gains by the end of the following year.
As I’ve written before, this is the ultimate “this time is different” stock. And, as the old saw goes, those are the four most dangerous words in investing.
With PLUG rallying to a six-year high, and up 190% so far in 2020, clearly investors are betting that this time indeed is different. And those bets make some sense. I’ve been (mostly) bullish on PLUG over the past year-plus. News heading into Thursday’s second quarter earnings release unquestionably is positive. The long-term opportunity is massive.
But the company’s history still colors the story, at least somewhat. And that history adds import to Thursday’s release. Plug Power has set itself up for success and to permanently change the narrative surrounding PLUG stock. But it needs to deliver in Q2.
For a number of companies this earnings season, investors generally have looked past soft results. The novel coronavirus pandemic has upended the global economy, and wrecked earnings in some sectors as a result.
Plug Power may not get the same benefit of the doubt. After Q1, the company reaffirmed full-year guidance for billings (revenue less changes in deferred revenue). Meanwhile, Plug Power’s biggest customers are Amazon.com (NASDAQ:AMZN), Home Depot (NYSE:HD), Procter & Gamble (NYSE:PG), and Walmart (NYSE:WMT).
Those are pandemic winners. Demand from those customers in theory should have risen in Q2. Plug Power may see some weak demand from smaller customers, or higher manufacturing costs, but on the whole investors are going to expect growth in the quarter.
Given the rally over the past two months, expectations indeed may be high. And it’s fair to wonder if Plug Power can match those expectations. Recent history is modestly concerning on that front.
PLUG declined 4.6% on March 5 after in-line fourth quarter numbers. Of course, a plunging market was a factor. But investors shrugged at the Q1 report as well. It wasn’t until a month later, when electric vehicle and hydrogen stocks started taking off that the rally began in earnest.
That said, PLUG’s rally isn’t just a result of the stock benefiting from an updraft in environmentally friendly stocks. Plug Power has given investors reason for optimism in recent weeks.
In June, Plug Power announced two acquisitions. The company picked up producer United Hydrogen, improving its supply of a gas that has seen shortages on occasion. And it added generator manufacturer Giner ELX as well.
Our Louis Navallier applauded the moves. So did Wall Street analysts. Plug Power itself raised its 2024 targets, with the Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) projection increasing 25%.
A month later, Plug Power added an organic opportunity. The company announced the launch of its GenSure platform. These are stationary fuel cell systems designed for backup power.
In other words, Plug Power is expanding out of its legacy footprint onto the turf of Bloom Energy (NYSE:BE). That company itself has a $1.8 billion market capitalization. If Plug Power can capture even a portion of Bloom’s business, or grow the market, GenSure can be material to PLUG’s $3 billion market value.
An Inflection Point for PLUG Stock?
But, again, that history looms. This is a company that didn’t generate positive full year adjusted EBITDA until last year, 22 years after its founding. Wall Street analysts generally are bullish on the stock, but don’t see net profit arriving until 2023.
The balance sheet remains an issue: Plug Power burned $66 million in cash in Q1. A convertible bond issuance in May had a conversion price of just $5.03, after the company sold 40 million shares of stock at $2.75 in December.
More broadly, hydrogen and fuel cells have been the technology of the future for some time and haven’t really gained traction. Plug Power’s major customers suggest that may change, but the company still has a lot of work left to do.
Put simply, there are reasons for caution, if not outright skepticism. Indeed, almost 20% of the float still is sold short.
And for PLUG to keep soaring, it’s probably going to need to find new buyers, which will require converting at least some old skeptics. That’s why the Q2 report is so important.
Indeed, the report can set the tone for PLUG for some time. A blowout quarter cements the story — and inspires investor confidence in the story. Anything less, and the roughly 125% rally since early June looks like potentially too much. And PLUG perhaps goes back to being the “show me” story it was heading into 2020.
Forced to choose, I’d bet Plug Power passes its earnings test with flying colors. For its shareholders’ sake, it better.
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.