To butcher that timeless tagline from Timex, 2020 has been the year when some stocks took a licking while others kept on ticking. But in the case of Plug Power (NASDAQ:PLUG), that terrific ticking is louder than a time bomb. In fact, PLUG stock has smashed the ceiling with so much force — it’s up more than 400% this year — you might find yourself tempted to skip “Should I buy?” and go straight to “How much should I buy?”
Yes, it’s been quite the bull run for a company virtually unknown when the year began. What’s more, it produces hydrogen fuel cell systems, not the kind of item to make you drop everything and head for the closest e-commerce site. But exciting for investors? Oh yeah, when you consider that this technology could replace conventional batteries in electric vehicles.
Now here’s where it gets…kinda weird. As fellow InvestorPlace writer Josh Enomoto has pointed out, PLUG stock has a fascinating correlation to shares in Tesla (NASDAQ:TSLA). I’ll let Josh explain, as this sort of stuff often escapes me: “From the beginning of this year, Plug and Tesla shares have recorded a 97% correlation coefficient.” By the way, that’s held true for the entire year, dipping just a hair these past few weeks to 96%.
But what does this mean? Since Tesla isn’t using Plug Power products, nor has announced any agreement to do so, you have to wonder. The math is irrefutable, but the correlation may at some level be irrational. For what is Wall Street if not the home of irrational exuberance?
Making Sense of the Tesla-PLUG Stock Correlation
As a best-case correlation scenario, PLUG stock is enjoying a rocket ride as the EV sector spreads its wings and, in theory, will demand bleeding-edge power technologies. The association to Tesla takes on an added edge when you consider that Tesla’s recent Battery Day was an anticlimactic event devoid of any big reveal. Enter Plug Power? Maybe not such a far-fetched scenario, fantasy sports fans.
But at worst, the PLUG stock-Tesla linkage represents an absolutely spurious correlation. Like? Per capita cheese consumption versus number of people who died by getting tangled in their bedsheets. Someone actually researched this and it’s 94.7% over nine years. Just in case you were wondering. (How many of the dearly departed were eating cheese in bed the data doesn’t say.)
The lesson here is that just because two things correlate doesn’t mean they connect. We all know that whole Kennedy-Lincoln bit where both were assassinated in front of their wives, had successors named Johnson, all that. I’ve even heard Honest Abe invested in Tesla and JFK favored Plug Power; I just can’t confirm it. Which is to say that the energy spent on some goose chases might be better reserved for a more singular focus, which I’ll indulge next.
From Bumbling to Rumbling
I like the phrase Josh used to describe Plug Power’s reputation previous to 2020, “bumbling upstart.” It forces us to consider what changed with this underperformer, which has been around now for nearly a quarter century. Because our 24/7 financial news cycle encourages way-short attention spans, I’ll point out that as a long play, PLUG stock has been a disappointment. At $16.61 per share, it trades at less than half what it did at this time in 2007, and 86% less than its opening price in 1998.
And while a certain portion of the investment set digs the word “pre-revenue,” I’ll stick with the Luddite term “unprofitable,” because that’s what Plug Power is. If a company that’s been public since the late 20th century still lacks a price-to-earnings ratio, don’t ask me to hold my breath, even if I have a hydrogen fuel cell system autographed by Kim Kardashian to assist me.
To play devil’s advocate to myself, everything before 2020 might as well serve as prelude if Plug Power is onto something. Tesla correlations aside, is the PLUG stock run-up a reflection of major developments behind the scenes? The answer, as it turns out, has more to do with the broader scene: Plug’s place within the energy sub-sector known as “the hydrogen economy.”
Plug Power Speculative But Special
No less a source than McKinsey released a report last month entitled “Road Map to a US Hydrogen Economy.” If you’re seriously considering PLUG stock, I suggest you read this 96-page dossier, or at least significant chunks of it. But if you’re strapped for time, then hit page 66. There you’ll find a graphic that projects the uses for hydrogen fuel sources, in steps, all the way through 2031. By 2025, it predicts we’ll be in the early scale up stages for hydrogen-powered cars, trucks and commercial vehicles.
Encouraging as this sounds, both for investors and the planet, it doesn’t make PLUG stock a lock. Nor does the Tesla correlation, which while intriguing still reeks more of investor behavior driving a self-fulfilling prophecy. But this energy sector niche shows great promise, while fossil fuels and the companies that produce them are fading fast.
It also helps to know that Plug Power has been around longer than most of the EV companies that may someday use its products, including Tesla. I don’t doubt that it has squandered opportunities in the past. But presented with a brighter-than-ever future for hydrogen energy, that narrative is primed to change. What might seem like buying at peak now is far from it when you peer just a few short years into the past — and might hardly seem so several years into the future.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
