Don’t Get Caught up in the Enthusiasm Over Plug Power Stock at These Levels

As we’ve seen from Plug Power (NASDAQ:PLUG), alternative energy is no longer the next big thing. In many ways, it’s already here and is a viable alternative to fossil fuels. That would mean  PLUG stock is a sure shot pick for your portfolio, right? Well, yes and no.

Source: Shutterstock

Plug Power is a hydrogen fuel cell company. The technology is interesting, and it’s certainly helpful in terms of serving certain niches. But other alternative sources of energy are becoming more cost-effective, such as lithium-ion batteries. Tesla and other EV manufacturers almost exclusively use these energy sources in their products.

PLUG’s price has surged over the last few months because of the alternate fuel and electric vehicle sectors’ general enthusiasm. It has little to do with the company or its fundamentals. That’s why I don’t think that it’s a good time to invest in this one.

PLUG Stock Is Suffering

Investing in alternate energy involves a lot of patience. Many of these alternate energy sources do not have a clearly definable market as of yet. That makes it an exciting yet risky space. Plug Power is hoping that its hydrogen-based fuel source will help power the next generation of equipment and vehicles. And that kind of optimism is not without merit.

Hydrogen and fuel cell technologies offer several benefits over other traditional fuel sources like coal, oil, and natural gas. It’s fast in terms of refueling and can be stored easily and for a long time. The only byproducts are water and heat, so you have zero pollutants and greenhouse gases.

However, there are areas where lithium-ion batteries take the cake in comparison to hydrogen fuel cells.

A higher percentage of electricity is generated and passed through to propulsion and is far more efficient. That’s why companies like Tesla are predisposed to using batteries. Considering the rapid growth of the EV market, this is bad news for PLUG stock.

Financials Paint a Sorry Picture

PLUG stock has problems on a fundamental level. The only bright spot for the company is that revenue is finally growing after several years. However, that’s not translating to profits, which shows poor cost management.

The company is also trying to invest heavily across the hydrogen fuel cell supply chain, from hydrogen sourcing to fuel cell manufacturing. Translation: Plug will continue to bleed money for the foreseeable future.

The problem here is that the company is financing its operations through stock issuances. That’s why the shares outstanding are increasing at an exponential rate while the revenues remain stagnant. And despite being in business for so long, analysts do not predict the company to be profitable until 2023.

I believe that these estimates are optimistic at best. There’s only one segment where Plug Power seems to have a leg up on the competition, which is material handling. In 2018, the market was worth $26.62 billion and is estimated to grow at and is expected to expand at a CAGR of 6.8%.

While the market is quite big, it does not compare with the EV market size by any means. Just to give you a quick comparison, the EV market’s worth stood at $162.34 billion and is projected to grow to $802.81 billion by 2027 — a CAGR of 22.6%.

Insiders Are Selling Their Stock

Table detailing insider transactions for PLUG (NASDAQ:PLUG)
Source: Chart by Faizan Farooque, data from filings

While insider selling is not a concrete indicator of where a stock will go, it does indicate where things are going. Over the past three months, there has been increased activity on this front, with everyone from the CEO to the CFO getting involved.

And can you blame them? I mean, we are talking about a stock with a 52-week low of 2.53 that is currently trading at just shy of $17 a pop. Outsized valuations notwithstanding, I don’t believe it’s a healthy sign when some of the biggest names on your ship press the abort button.

Final Word on PLUG Stock

I believe there is a lot to like about the concept the company is bringing to the table. And hey, everything related to the environment is in vogue these days. But there is a proof of concept problem that PLUG is grappling with.

Its recent surge in the stock market has little to do with itself. Instead, the general optimism surrounding alternate energy is sweeping other stocks along.

With a company with such poor fundamentals, I don’t think that the company should be trading at 20.80 times forward price-to-sales when the sector median stands at 1.24 times.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


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