Red-hot Plug Power (NASDAQ:PLUG) stock plunged in mid-August after widely respected short-seller Citron Research targeted the stock in a Twitter (NYSE:TWTR) post which basically called PLUG stock an over-hyped, overvalued bubble stock that will collapse back to $7.
Savvy investors shouldn’t pay much attention to this post.
Citron’s attacks against the stock and company are either inaccurate or misrepresented, and Citron has a long history of being wrong on PLUG stock as well as other emerging, hyper-growth stocks with a ton of momentum.
Plus, the fundamentals underlying Plug Power stock remain vigorous. The valuation is a bit stretched. But it’s nothing to worry about in the big picture.
Net net, I say ignore Citron, stick with the rally and buy on dips.
Here’s a deeper look.
Plug Power Will Not Miss Revenue Guidance
The first thing Citron says about Plug Power in the Twitter post is that the company “will miss 2020 revenue guidance by 40%”.
This is a very outlandish thing to say, which will likely prove wildly inaccurate. For a few reasons.
First, Plug Power has topped revenue estimates for 5 straight quarters, and 7 of the last 8 quarters, including an impressive 20% revenue beat last quarter. To think the company is now going to miss third and fourth quarter revenue estimates by a wide mark seems far-fetched.
Second, the clean energy revolution is gaining momentum everywhere, especially in the hydrogen vertical, where technological advancements are turning hydrogen tech into an ideal, cost-effective solution for certain high-usage, condensed end-markets (like warehouses with hydrogen forklifts). Plug Power’s growth trajectory speaks to this. Year-to-date, the company’s revenues are up nearly 40%, on top of 32% revenue growth last year. Again, to think that this momentum is going to suddenly dry up seems just as far-fetched.
Third, Plug Power is doing everything right today so sustain robust momentum. The company is launching new products, making strategic acquisitions, expanding into new end-markets, landing new deals, so on and so forth — the sum of which broadly imply that this company’s string of revenue-beating quarters will persist, not end.
Fourth, in order for Plug Power to miss 2020 revenue guidance by 40%, the company would have to report essentially a 50% drop in second half 2020 revenues, after first half revenues are up about 40%. That sort of cliff drop in revenue growth just doesn’t happen all that often, and it very likely won’t happen with Plug Power.
R&D is Not Paltry
The second thing that Citron says about Plug Power is that “R&D has been paltry”.
This is not the case.
R&D dollars in both 2018 and 2019 measured around $34 million, and are on track to exceed $40 million this year. Excluding 2019 (which is a historical anomaly), that represents just under 20% of total revenues — which is, as you would expect, massive for any company.
By comparison, Tesla R&D spend as a percent of total revenues was about 5% last year.
Of course, scale plays a factor here. On a raw dollar basis, Tesla spends way more than Plug Power on R&D. But pointing to scale as a reason why R&D at Plug power is paltry is flawed.
The reality is that, for a company of its size, Plug Power spends as much on R&D as anyone else, and arguably more.
No Early Stage Growth Company is Profitable
The third thing Citron says about Plug Power is that the company has never generated a profit.
True. It hasn’t.
But Tesla didn’t do so on a consistent basis until 2019. Indeed, there are ton of very strong growth companies out there — like Shopify (NYSE:SHOP), Wayfair (NYSE:W) and Roku (NASDAQ:ROKU) — who have yet to sustainably generate profits, but which soared on Wall Street.
The reality is that early stage growth companies shouldn’t be profitable. They should be putting all their money back into the business, spending every dime they have to execute on the massive opportunities ahead of them.
Plug Power is no exception.
The company has a tremendous opportunity in front of it when it comes to the hydrogen economy, and management is executing flawlessly against that opportunity by winning new business, creating next-gen tech, launching new products and making strategic acquisitions.
So don’t worry about profits today. They’ll come with scale. Much as they did at Tesla.
The CEO is Selling, But That’s Not Worrisome
The fourth thing Citron says about Plug Power is that “CEO Andy Marsh has sold 95% of his position at an average price of less than $7 per share”.
This is also true. Plug Power’s CEO has been selling a ton of stock since February.
But this selling is totally expected, par-for-the-course and not that worrisome.
Insiders sell stock all the time. Indeed, that’s all they’ve been doing for several quarters over at Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX), The Trade Desk (NASDAQ:TTD), Square (NYSE:SQ) and many other red-hot, high-quality companies with soaring stock prices.
When stocks take off like rocket ships, insiders sell sometimes. It’s what they do. And it’s really nothing to be all that worried about.
If this selling by Marsh was accompanied by a breakdown in the fundamentals, then I’d be worried.
But it’s not. In fact, the opposite is true.
Plug Power Stock is Expensive, but Not Overvalued
The fifth, and final thing, Citron says about Plug Power is that PLUG stock trades at a “100% premium on EV/sales” to TSLA stock.
According to YCharts, this isn’t entirely true. PLUG stock trades at 21-times EV to trailing sales. TSLA stock trades at 15-times EV to trailing sales.
But the argument still somewhat holds. PLUG stock is more expensive that TSLA stock.
This premium is a byproduct of one simple fact: Plug Power is far earlier in its growth narrative than Tesla, and therefore, growing much more quickly.
Tesla is a $400 billion clean energy giant that already has the best selling electric cars in the world and one of world’s largest solar businesses. Plug Power, meanwhile, is a $5 billion clean energy company that is just starting to disrupt legacy energy solutions with its hydrogen tech.
To that end, in the second quarter of 2020, Tesla’s revenues actually dropped 5% year-over-year. In the same quarter, Plug Power’s revenues rose 18%. Over the next five years, Tesla is expected to grow revenues at a 24% compounded annual growth rate. Over that same stretch, Plug Power is expected to grow revenues almost twice as quickly, at a 45% compounded annual growth rate.
So, is PLUG stock more expensive than TSLA stock? Yes.
Should it be? Also, yes, meaning the valuation concerns brought up by Citron don’t hold much water.
A Poor History with Growth Stocks
It’s worth mentioning that Citron Research has a poor history of shorting hyper-growth momentum stocks.
This is the same short-seller that called Shopify a “get rich quick” scheme back in 2017, when the stock was trading around $100, and made a bold call for the stock to retreat to $60. It has since risen more than 10X to over $1,000.
It’s also the same short-seller that called Wayfair extremely overvalued in 2015, and slapped a $10 fair value on the stock. Wayfair stock today trades above $300.
And the same short-seller that called Roku “uninvestable” in January 2019. ROKU stock has surged about 4X since then.
Citron was also dead wrong on its bearish take on a pair of solar stocks back in September 2019: SolarEdge (NASDAQ:SEDG) and Enphase Energy (NASDAQ:ENPH). Both of those stocks are up more than 100% since Citron said they were going to collapse.
The list truly goes on and on.
I’m not saying you shouldn’t listen to Citron. I actually like a lot of the stuff they post, and agree with it more often than not.
But the firm has a track record of being wrong on hyper-growth momentum stocks, consistently underestimating just how much firepower they have, and how revolutionary and disruptive their business models and technologies are.
I believe PLUG stock falls into that category.
Bottom Line on PLUG Stock
When it comes to Plug Power stock, don’t listen to Citron.
This is a firm — with a poor track record of shorting hyper-growth, early-stage momentum stocks like PLUG — making false and misrepresented claims about a business that is absolutely on fire right now.
PLUG stock may be weak for a few days.
But it will ultimately shake off this temporary headwind.
And once it does, PLUG stock will get back into rally mode as the company sustains huge growth behind its robust portfolio of value-additive and cost-effective hydrogen tech solutions.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SHOP, ROKU, FB, NFLX, TTD, and SQ.