Plug Power (NASDAQ:PLUG) stock has been surging higher. In the last six months, PLUG stock has skyrocketed by 268%. There are fundamentally strong reasons for this optimism. However, in the recent past, the stock has cooled-off from highs. I would wait for further correction before exposure to PLUG stock.
In particular, at a time when U.S. market valuations look stretched and presidential elections add to the near-term uncertainty. It might not be a good idea to consider exposure to a stock with a beta of 1.3.
I must admit at the onset that I had a relatively neutral to bearish view on PLUG stock in the past. My main reason was a potentially slow growth in the hydrogen fuel economy. In particular, because hydrogen fuel is a much more expensive option than other clean energy sources.
However, a recent study has concluded that hydrogen fuel can be as cheap as gas in five years. In March 2019, Stanford researchers also created hydrogen fuel from seawater. This is an inexpensive option as compared to creating the fuel from highly purified water. The research also concluded that the “new method will open doors for increasing the availability of hydrogen fuel powered by solar or wind energy.”
Planes, Trains and Automobiles
Back in fiscal year 2018, Germany rolled-out its first hydrogen-powered train. The train was built by the French company Alstom (OTCMKTS:ALSMY). According to Alstom, others countries looking into hydrogen trains include Britain, the Netherlands, Denmark, Norway, Italy and Canada.
More recently, Airbus (OTCMKTS:EADSF) revealed a new zero-emission concept aircraft. This aircraft will rely on hydrogen as a primary source of power. Clearly, there is gradual progress in terms of adoption of hydrogen fuel.
This is good news for Plug Power as the company prepares to benefit from the inflection point in the hydrogen fuel economy.
Europe Could Be Game Changer
The European Union is mulling a “hydrogen strategy for a climate-neutral Europe” according to a July 2020 report. One of the most important points in that document is that, “The share of hydrogen in Europe’s energy mix is projected to grow from the current less than 2% to 13-14% by 2050.”
If this target has to be achieved, the coming decades will require significant investment in the hydrogen fuel business. Plug Power has targeted Europe a key market for growth. I believe that entry in the region will be a game changer for the company.
In terms of making inroads in Europe, Plug Power signed an agreement with U.K. based supermarket Asda. The company will be providing “hydrogen fuel cell solutions to power the lift truck fleet within the retail giant’s extensive supply chain network.”
It’s also worth noting that companies like DHL and FedEx (NYSE:FDX) have already been using the company’s fuel cell solutions. These companies have significant presence in Europe and Power Plug stands to benefit.
Of course, it’s unlikely to be a smooth ride for Plug Power.
A McKinsey report on U.S. hydrogen economy pointed out the level of capital required to build foundational hydrogen infrastructure. This holds true for the U.S. as well as Europe. Significant investment is required to boost the hydrogen fuel infrastructure. Unless that’s achieved, wide scale adoption of hydrogen fuel is unlikely.
My point is underscored by the fact that Plug Power has some big clients for years. These include the likes of Walmart (NYSE:WMT), FedEx and Amazon (NASDAQ:AMZN). However, the company reported net revenue of $108 million for the first half of the year. It’s clear that existing clients have gone slow on fuel cell solutions adoption.
Concluding Thoughts on PLUG Stock
Spruce Capital published a bearish report on PLUG stock in December 2019. One of the key points in the report was the company’s revenue growth in the recent past being triggered by vendor financing. The company’s restricted cash was at $230 million for June 2020 with restricted cash increasing in-sync with top-line growth.
While recent developments have been encouraging. It remains to be seen if the company’s revenue growth comes without vendor financing.
Overall, Plug Power has ambitious plans for the next five years and the company seems to be moving in the right direction. However, I would like to see further correction before any fresh exposure. The growth plans are long-term and the stock seems stretched.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
