It’s impossible to comment on Plug Power (NASDAQ:PLUG) without remarking that the company has posted more than a 300% gain since it was trading around $2.75 in March. But the more relevant story for PLUG stock investors is that the trajectory of the stock has been on a clear uptrend.
Investing in hydrogen technology is always going to be volatile. However, investors are finally seeing the higher highs and higher lows that suggest something different is happening.
So, what’s the difference? There’s no doubt that Plug Power is bringing new clients on board. And they’re also experimenting with promising new applications.
But one of the major factors that has always held hydrogen back is the cost to produce. That cost has been going down. But in an irony of ironies, the push towards alternative fuels may create a short-term obstacle for PLUG stock.
Hydrogen is Clean, Not Always Green
Hydrogen is highly reactive and not an energy source in itself. It has to be “made” from some other primary fuel. Today, the most cost-effective way to produce hydrogen is through natural gas. This process converts natural gas to hydrogen and CO2 and is how 95% of the world’s hydrogen is created.
However, while hydrogen is a form of clean energy, when it is produced with natural gas, it still leaves a carbon footprint that doesn’t qualify as being a green source of energy. In fact, the carbon footprint of hydrogen that is produced from natural gas is higher than directly burning the natural gas.
It has however been a major reason that the market for hydrogen fuel cells has opened up. According to IHS Markit, since 2015, the cost to produce hydrogen using natural gas has dropped 45%.
The firm went on to conclude that if natural gas costs continue to fall, hydrogen could produce 10-25% of the world’s energy needs by 2030.
PLUG Stock Needs Oil Prices To Be In The Sweet Spot
However natural gas may not be falling for very long. Should the outcome of the presidential election result in a transfer of power, elements of the Green New Deal are likely to be proposed.
That would be bad news for oil stocks and particularly for shale oil providers. Proponents of the Green New Deal may dislike big oil, but they loath shale producers. However, the shale boom that occurred in the Trump administration has helped to maintain equilibrium in supply and demand. And prior to the pandemic, it was keeping oil and natural gas costs in the sweet spot.
But in a Biden-Harris administration, shale producers would find it difficult to stay in business. And if shale producers decide to call it quits, natural gas costs will be rising.
Green Hydrogen Is Coming, But Not Yet
The answer of course is to be able to produce hydrogen in a green fashion. The good news is that this is more than a theoretical possibility. The bad news is that it’s still not commercially viable at this time.
However, Plug Power president and chief executive officer Andy Marsh said in the company’s most recent earnings call that he believes over the next 10 years, hydrogen generated from renewables (e.g. wind, solar, hydro power) will be cost competitive with hydrogen generated from natural gas.
A Caution Flag, Not a Red Light
I like Plug Power and think it’s probably the best of the hydrogen stocks to buy. The issue I’m raising is not meant to change the long-term bullish thesis for hydrogen power in general. But investors can get skittish about PLUG stock when they see significant price movement. And despite the overall upward trend, there has still been a lot of volatility.
If you’re going to invest in Plug Power, keep your eye on natural gas prices. If they start to rise, it might be a signal that the stock is ready to drop. That can help you set up some profitable trades as you increase your position.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.