When Plug Power (NASDAQ:PLUG) reported quarterly earnings in August, investors steadily accumulated a position. Earlier this month, PLUG stock peaked at $19.02. The stock pulling back and finding support at the moving average. So, investors who missed the entry point at $5.00 months ago may look at it again.
What are Plug Power’s fundamental strengths that would justify buying it?
PLUG Stock in an Uptrend
Plug Power surged ahead when analysts piled on rating upgrades. Those reports are only opinion pieces and suggest that investors should steer clear when everyone else is buying. Analysts from investment houses like Morgan Stanley (NYSE:MS) and Cowen & Co. issued price targets in the $14.00 – $15 range.
In the second quarter, Plug lost 3 cents a share on a GAAP basis. Revenue rose 18.3% year-on-year to $68.07 million. At an adjusted EBITDA of just $1.22 million, the over 22 times price-to-sales appears excessive. Speculators are playing a dangerous game holding an expensive stock. The company is losing money and has negative cash flow.
At some point, the market may grow tired of paying a premium for a company whose revenue increases but does not earn a profit. So long as the macro backdrop ignores such risks, markets will value Plug Power in the $3 billion – $5 billion range.
Short-Squeeze in Play
Bears have a big short position on Plug Power. The short float is almost 20% (per finviz). The stock has over five warning flags. Here are some of them:
|Beneish M-Score||Medium||Beneish M‑Score: -1.75||The Beneish M-Score is a probabilistic model for how likely it is that a company’s earnings have been manipulated. Consider valuing this company by its cash flow ratios such as “Price to Cash Flow” instead of its P/E ratio since cash flow is not easily manipulated.|
|Negative Cash Flow Years||Medium||Number of Years: 10; Operating Cash Flow: -114; Equity: 240||In the last decade, this company has had several years with negative operating cash flow. No company can survive long with negative cash flow so make sure you understand this risk.|
|Number of Earnings Misses||Medium||Number of Quarters: 6; EPS Surprise: –||Over the past 10 quarters, there have been several earnings misses. Historically, meeting or beating estimates are twice as common as missing. Frequent misses are a warning sign to investigate.|
On its conference call, CEO Andrew Marsh raised its$1.2 billion revenue target for 2020 to around $2 billion. This will allow the company to invest in facilities among different localities. It will negotiate with the different states across the country. Look for the company shrewdly closing deals at favorable cost levels. The old economy in such industries as retail and movie theatres is faltering. That means property owners will have to accept deals at below market value, saving Plug Power on capital costs.
Late last month, Plug Power said it would source all of its energy from Brookfield Renewable to power one of its production facilities. Plug needs 10 tons of 100% green liquid hydrogen daily. In doing so, the company will get closer to attaining zero-carbon emissions. CEO Marsh said the company will achieve its “overall hydrogen strategy of building green liquid hydrogen generation facilities with strategic partners in the U.S. and globally thereafter.”
A five-year discounted growth exit model uses the Perpetuity Growth formula (also known as Gordon Growth) to calculate Terminal Value after five years. Assume the following metrics:
|Discount Rate||7.5% – 6.0%||7.00%|
|Perpetuity Growth Rate||4.0% – 5.0%||4.50%|
|Fair Value||$9.46 – $38.34||$14.03|
Readers may enter their revenue growth assumptions here. In the above scenario, Plug Power is worth $14 a share.
The pessimistic investor will assign a lower discount rate and perpetuity growth rate. That would lead to a sharply lower fair value target. Selling pressure might intensify ahead of the company’s next earnings report. So, the downside price target would give investors a good estimate of how low shares may fall.
Additionally, be nimble when invested in Plug Power. Sell the stock when others are doing so and buy it when the selling is overdone. Timing both events is not easy but is worth the effort.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.