Hydrogen fuel cells have gained a lot of traction in the ever-evolving alternative energy space. One of the major players in the business is Plug Power (NASDAQ:PLUG), which is pushing the boundaries in the industry. Despite a 160% growth in sales in the past two years alone, it is yet to turn a profit since its inception. However, its vertical integration strategies in the green hydrogen realm could be a significant catalyst for future growth. Nevertheless, its fuel cell business continues to lose ground to batteries. Hence, PLUG stock is a risky bet at this stage.
Plug Power’s second-quarter results came in ahead of expectations. Margins and volumes improved on the back of record gross billings. Despite the impressive results, earnings were still in the negative with record levels of cash burn.
On top of that, you have Tesla (NASDAQ:TSLA) and other tech giants investing heavily in batteries.
Therefore, it’s tough to bet on PLUG stock at this point.
A Strong Quarter but Still No Profits
Plug Power has done exceedingly well to increase its revenue over the past seven years. However, despite the consistent increase in sales, it has struggled with its net profits, which have gotten progressively worse.
This is apparent in its second-quarter results, where it posted gross billings over $72.4 million. Overall revenue improved 67% sequentially from the first quarter. Despite the stellar revenue, net income was at negative $8.66 million. Though it’s a massive improvement over the first quarter, it illustrates its inability to be profitable.
A large part of this is because it’s selling its fuel cells in a highly competitive forklift market. Its clients are typically cost-conscious, and therefore, the company has failed to develop its pricing supremacy. Additionally, margins with two of its biggest clients in Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) continue to deteriorate.
Moreover, the company’s financial health is worrying on the back of record cash burn. Its debt to equity ratio is currently 2.73, which dwarfs its 10-year median of 0.05. Free cash flow margins are at a negative 50.7%, which are slightly higher than its five-year median. Also, its one-year increase in debt is 20.1% higher than its average 10-year growth in debt. With its substantial capex requirement, expect debt levels to rise even more down the line.
Batteries Have More Potential in the Clean Energy Market
The hydrogen fuel cell versus battery electrics conversation could define the commercial vehicle space in the future. Various companies are investing in the two technologies based on their relative potential.
Automobile giants Tesla and General Motors (NYSE:GM) are betting big on lithium-ion batteries along with other tech giants. However, hydrogen fuel stocks have been getting a lot of traction from investors as well. Shares of Plug and its competitor Bloom Energy (NYSE:BE) have gained more than 300% this year.
Off late, the company is working specifically toward expanding the vertical integration strategy for its green hydrogen business. Plug Power recently acquired Giner ELX and United Hydrogen to develop a foothold in the green hydrogen market. It expects these efforts to take revenue to up to $1.2 billion by 2024, which would take its compound annual growth to more than 40%.
However, the reality is that the tide is firmly in favor of batteries. Though fuel cells have higher energy density and quicker fueling, they are way behind batteries in cost efficiency. Management consultants Horváth & Partners noted that electric vehicles using batteries tend to have a 70% to 80% efficiency rate compared to the 25% to 30% efficiency of fuel cell cars.
Therefore, the long-term success of hydrogen fuel cells is in serious jeopardy. Plug Power continues to pump more money into advancing its hydrogen fuel cell business. However, if the business continues to lose ground to batteries, it would be in a tough spot in the future.
Final Word on PLUG Stock
Plug Power finds itself in a dicey situation.
The company seems confident about the potential of hydrogen fuel cells and their role in the clean energy markets of the future. However, batteries have the edge over fuel cells and are backed by some of the biggest names in the stock market.
Additionally, Plug Power’s inability to turn a profit and it’s weak balance sheet are a significant cause for concern.
The company’s foray into the green hydrogen market seems promising, but it’s still relatively premature to talk about its effectiveness. Therefore, I would avoid PLUG stock at this point.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.