Does a Biden administration bode well for Plug Power (NASDAQ:PLUG)? On the heels of the Democratic Party nominee winning the U.S. Presidential election, it’s no surprise investors are betting on “green wave” stocks. Not only did the candidate promise to invest trillions into green initiatives. He also vowed to help phase out big oil.
In short, the Biden years could mean blue skies ahead for this alternative energy stock. But, it’s not as if this catalyst wasn’t already priced into shares. Long-favored to win the election, investors have been bidding up this stock since late September, in anticipation of his victory.
As a result, shares today are more richly priced than ever. Sure, after its success making hydrogen fuel cells (HFCs) a power source for materials handling (forklifts), a pivot towards the EV space seems like the next step.
The problem? There’s a lot of excitement over the prospect of HFCs becoming a power source for EVs; however, it’s no slam dunk. Battery electricity remains the preferred energy source.
With this in mind, it’s debatable whether there’s significant runway ahead of for Plug Power, one of 2020’s best performers on the market. That’s not to say we’ll see shares give up their gains anytime soon. But, for those who missed out on the earlier gains seen this year? Now may not be the time to dive in.
PLUG Stock: A Biden Presidency and an Unsustainable Valuation
With President-elect Biden promising to invest $2 trillion into green initiatives, the bull case for Plug Power just got a little bit stronger. But, it wasn’t as if the specter of a more “eco-friendly” administration wasn’t already priced into shares.
How so? Shares have nearly doubled since September, when it became clear Biden was the heavy favorite to win the White House. This was after the stock’s nearly five-fold rebound off its March lows.
Typically, investors buy the rumor, and sell the news. But, for this Plug, it seems they’ve bought the rumor, and bought again on the news. As a result, shares are richly priced. Not only relative to current results. But, relative to the company’s ambitious 2024 revenue and EBITDA goals as well.
A few months back, the company upped its ambitious revenue and EBITDA projections. The company now estimates it’ll have $1.2 billion in sales, and $250 million in annual EBITDA by 2024.
In sho1rt, based on the company’s current enterprise value, or EV, of $7.92 billion, investors are valuing the company at a rich multiple of where results could be, four years out.
That’s putting the cart before the horse, to say the least. Especially given this company stills posts negative operating earnings, and even the most bullish analyst estimates call for sales to remain below $500 million in the coming year.
What’s behind this irrational valuation? Chalk it up to the “EV Bubble.” But, while this company has a shot at gaining a foothold in that fast-growing market, the jury’s still out whether it’ll manage to gain meaningful market share.
Shares Could Head Lower
You can’t deny the “EV bubble” has been the major driver behind this stock’s three-digit moves higher in 2020. That is to say, the tide of investors diving into stocks like Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) has risen all “green vehicle” boats, including Plug Power’s.
How does the rise of EVs benefit Plug? Much of their business remains in both the materials handling and stationary power end markets. But, as InvestorPlace’s Lou Carlozo wrote Nov. 9, the early scale up stages for hydrogen powered cars and trucks could be just a few years away.
Yet, while it’s possible hydrogen fuel cell stocks like this one will benefit greatly from a long-term shift away from fossil fuel-powered vehicles, is it probable?
That’s debatable. As this commentator noted late last month, an increasingly difficult road may lie ahead for Plug Power. Simply put, with more opportunity, there’s now more competition in the clean energy transportation space. This company could still “crush it” in its existing markets. Yet, battery electricity may still prevail as the predominant fuel source for electric vehicles.
In short, Plug Power may see minimal benefit from the EV megatrend. And without this exposure, it’s doubtful shares can maintain their current valuation.
Wait for Post-Election Hype to Fade
So, what’s the call on Plug Power? Sure, the company’s prospects may have improved by the news of a Biden presidency. But, the stock’s epic performance so far this year may have already priced-in this political catalyst.
Not only that, the company’s growth runway may not be as massive as investors currently project. While it could continue dominating its existing markets, its potential in the EV realm appears questionable.
In short, with its likely (and long-shot) catalysts more than priced in, avoid investing in Plug Power.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
