Red-hot Plug Power (NASDAQ:PLUG) stock dropped big on Tuesday, after the hydrogen economy leader announced a $750 million capital raise at below-market prices.
Specifically, Plug Power is selling 38 million shares of common stock to the public at $22.25 per share. The PLUG stock price at the time the offering was announced was north of $25.
Naturally, in response to the news, Plug Power stock is falling back toward the offering price.
Makes complete sense. And if you’re worried about the stock dropping 7% in a day, don’t be. It’s par-for-the-course for hypergrowth companies with soaring stock prices to capitalize on their market momentum and issue favorable equity raises at below-market prices, giving them the funds to further enhance their growth profile.
I’ve seen this dozens of times. It usually results in near-term weakness, followed by some consolidation, and then a breakout higher.
PLUG stock should follow that pattern.
Dilution Offset by Balance Sheet Firepower
Investors usually don’t like equity raises. Technically, what they amount to is dilution through new shares.
Plug Power’s equity raise will do just that. The diluted share count last quarter was around 370 million. This new offering adds 38 million more shares into the mix. Thus, the share count will rise to over 400 million. Plug Power stock price equals the value of the company divided by the share count. So, even if the value of the company doesn’t change, the PLUG stock price should in response to this offering thanks to a bigger share count.
Simple enough, right? Equity raises = bad news for existing shareholders.
But, that cursory analysis lacks context. That context is two-fold.
One, hypergrowth companies with soaring stock prices almost always take advantage of their market momentum to raise money via a favorable equity offering. This is a par-for-the-course move that’s entirely unsurprising.
Two, hypergrowth companies do these raises because these companies are usually in the early stages of pioneering a new market category. Doing so requires a lot of spending to attract customers, build brand awareness, develop technical advantages, and fend off competition. To that end, well-run hypergrowth companies usually leverage equity raises to enhance their growth profile and boost the company’s underlying fundamentals.
Zooming out, then, I’ve found that when it comes to hypergrowth stocks and equity raises, there’s a clear pattern.
Stock soars for several months. Company announces equity offering at below-market prices. Stock falls back towards the offering price. Stock consolidates around those levels, then shortly thereafter gets back into rally mode.
PLUG stock should follow this exact pattern.
Plug Power Growth Narrative is Still Strong
The reason PLUG stock will follow this typical “weak today, strong tomorrow” pattern is because the company’s long-term fundamentals remain unchanged and exceptionally robust.
That is, the Hydrogen Economy is still on the cusp of an enormous, multi-trillion-dollar tipping point (powered by shifting laws, falling costs, and improving technology) wherein hydrogen fuel cells will become the commonplace clean energy source in long-range, heavy-usage situations, like local transit, cargo, materials handling, and stationary.
At the same time, Plug Power is still rapidly emerging as the unrivaled leader in this Hydrogen Economy, with its best-in-breed fuel cells that are already being robustly adopted in the materials handling industry and which are increasingly being applied to various other transportation and stationary end-markets.
In other words, forget the equity raise for a moment. Plug Power is still the leader in a hypergrowth industry with enormous long-term potential.
The new funds from the equity raise will only give Plug Power more financial resources to execute on its long-term vision.
It remains to be seen where these funds specifically will be allocated, but my guess is that the company will use a bulk of it to build out its Green Hydrogen vision and expand its exposure to the hydrogen transportation market — two things which will inevitably add more firepower to Plug Power’s already strong long-term growth narrative.
Long story short, PLUG stock is ideally positioned to follow a “weak today, strong tomorrow” pattern which ultimately means you shouldn’t stress this sell-off. At all.
Valuation Remains Favorable
Perhaps one reason investors are worried is that Plug Power priced the offering at $22.25 per share, versus a $25-plus price on PLUG stock at the time.
But, again, this is par-for-the-course. And, in the big picture, it means nothing about the stock being “overvalued”.
Shopify (NYSE:SHOP) did an equity raise about a year ago at a $317.50 share price. At the time, the stock was trading around $350. SHOP stock fell on the news. Then rebounded. Sharply. Today, shares trade around $1,000.
A few months ago, Twilio (NASDAQ:TWLO) did an equity raise at $247 per share, while the stock had nearly touched $300 just a few days prior. TWLO stock fell on the news. Then rebounded. Shares soared about $340 not too long ago.
I could go on and on. But you get the point.
Hypergrowth companies often do equity raises on the heels of huge stock price rallies at below-market prices — and it almost never means anything about the stock being “overvalued”.
To determine valuation, you have to look at the fundamentals, not the equity raise price.
When you do that with Plug Power, it becomes clear PLUG stock is not overvalued.
Hydrogen fuel cells are on the cusp of fundamentally disrupting the global energy generation and storage market. Plug Power is at the epicenter of this disruption, meaning the company one day projects as a future titan of the multi-trillion-dollar energy industry. Yet, the company’s market cap is below $10 billion.
Clearly, if Plug Power executes, there’s plenty of room for further appreciate in the PLUG stock price.
Bottom Line on PLUG Stock
Plug Power stock is a long-term winning play on the emerging Hydrogen Economy. This sell-off on the heels of a below-market equity raise is non-news. If you own the stock, use recent weakness to add exposure. If you’re new to the name, use recent weakness to being establishing a long-term position.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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