Investors eager to put money into Plug Power (NASDAQ:PLUG) stock are what a recent McKinsey report would refer to as supporters of the “ambitious scenario.” Before I explain what that scenario entails it’s pertinent to summarize why plug is garnering the attention that it has.
Year-to-date, PLUG stock it has risen from around $3 a share to more than $16. So, its growth has been exponential, having risen over 400%. This has all occurred despite the fact that the company is still searching for profitability.
Readers who’ve discerned that Plug Power is part of a trend are correct. Markets and investors have proven that they are ready to invest in the green energy push. Shares of companies like Tesla (NASDAQ:TSLA) show that consumers are interested in this push – if the product is right. It’s the most visible example. And there are many more. Point being, a new paradigm is here.
The ‘Ambitious Scenario’
But there’s a simple question to be answered: are you willing to bet on hydrogen, and do you think PLUG stock will rise long-term? Both of those occurrences could happen, but likely only under a certain scenario. And this is an important point because throwing money at trends is a surefire way to lose it.
The “ambitious scenario” outlined in the McKinsey report I alluded to before assumes U.S. businesses adopt hydrogen much more than they currently do. It assumes regulations which favor hydrogen. It assumes subsidies on state and federal levels. In a sense, all of the assumptions which are currently baked into PLUG stock’s pricing.
The so-called “base scenario” results in hydrogen accounting for 1% of U.S. final energy demand by 2050. In this case investors would not want to be invested in Plug Power. The alternative case results in hydrogen representing 14% of U.S. end-use power by 2050.
Where’s PLUG Now?
Despite price appreciation over the past year, Plug Power is in the base scenario case. I say that because the base scenario case characterizes current vehicle applications. It is very niche and far from mass adoption. Plug Power is a leader in hydrogen fuel cell vehicles in the material handling industry. This means forklifts. Hydrogen will require mass adoption, not just for niche applications like forklifts.
PLUG shares are extremely overvalued given that it reported negative EPS and lost $85 million in 2019. None of this is to say Plug Power is doomed. It isn’t. But consider this before jumping on the idea of hydrogen powering much more than it does now.
Where Hydrogen Excels
Fundamentally there isn’t much to be excited about with PLUG stock. The financial situation of the company would not garner investment if it operated in most other areas. But hydrogen has potential. And hydrogen specifically has potential to displace internal combustion engine vehicles.
But what kind of vehicles precisely? CEO Andy Marsh stated that EVs have the advantage in short-range applications. Being that Tesla and other manufacturers have already adopted EV technology, hydrogen won’t usurp that lead.
In the same Forbes article Marsh went on to say “FCVs will ultimately win in asset-intensive applications, such as fleet vehicles, airplanes, drones, and autonomous vehicles that require continuous run times and lighter weight engines. Of course, one of the biggest challenges will be creating a robust infrastructure with enough hydrogen fueling stations to keep vehicles running around the clock.”
Plug Power makes bold claims about the feasibility of hydrogen. Perhaps it will be in planes as it claims. And perhaps it will fuel many more transport trucks. But that requires a significant investment in infrastructure. Until there’s evidence to that effect, why throw money at this stock?
When I last wrote about Plug Power, I liked that they set quantitative goals defined by specific times. At the very least, such guidance sets a roadmap and relieves some of the wishy-washiness of growth stocks. Yet, from a financial perspective the company has not done much to deserve its rich valuation. I think it’s best to stay away at these prices wait for revenue numbers, and then reconsider.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.