Plug Power (NASDAQ:PLUG) reported excellent third-quarter results on Nov. 9, including a 73.4% sequential increase in its sales from the second quarter. Naturally, the share price jumped on the news.
As I write this on Nov. 13, its stock has gained 24% since its earnings report, with more gains likely to close out a very healthy week in the markets. Things have gotten so good that some in the media are asking when it will hit $30.
If the momentum keeps up, I’d say before the end of the year.
When I last wrote about Plug Power in late October, I suggested that given its share price had corrected, it might be time to buy its stock. You know what they say, “Even a blind squirrel finds a nut once in a while!” PLUG shares have gained 62% in the three weeks since. A decent chunk came post-earnings. I got lucky.
However, some of the deals it’s signed in recent months, including the Brookfield Renewable Partners LP (NYSE:BEP) green energy supply agreement, tell a story of a company whose vision is being taken seriously by major players in the clean energy arena.
That’s huge.
And it’s a big reason why I feel Plug Power is a long-term buy.
That said, I do think there are a couple of things to consider before buying more stock, especially when it’s trading at 31 times its trailing 12-month sales of $310 million and 23 times its 2021 revenue estimate of $430 million.
PLUG Stock and Warrants
According to Plug Power’s Q3 10-Q, the company has 187.9 million potentially dilutive shares that could be exercised at some point in the future. And while that’s down from 217.9 million a year earlier — 406.1 million shares were outstanding at the end of September, up 87.5 million from 318.6 million a year earlier — if all the shares were exercised, this would increase the share count by 46%.
I’m not suggesting you should sell your shares, but it’s important to understand what’s happening to the company’s capitalization structure. Right now, the company is using almost $200 million in free cash flow over a 12-month period, and that’s only going to move higher as it opens five green hydrogen plants over the next four years.
Yes, revenues will move higher, but so too will the capital expenditures and investment capital requirements to make these plants a reality.
At the end of the third quarter, Plug Power had a net debt of $250 million. Either it’s going to issue a bunch of debt or sell more shares to finance this expansion. With shares near an all-time high, I would assume the near-term plan is to continue to issue more stock.
From a capital allocation perspective, Plug Power’s in a bit of a pickle. Its share count has risen dramatically in recent years during a period of historically low interest rates. If ever there was a time to borrow, now would be it.
We’ll soon find out how they plan to deal with this issue, given the first two plants are expected by the end of 2022.
Amazon and Walmart’s Part to Play
As many followers are aware, Plug Power issued warrants to buy its common stock in 2017. At the end of September, 40.7 million of the 110.6 million warrants originally issued had vested and were exercisable. None have been exercised to date.
At some point, I assume that Amazon (NASDAQ:AMZN) and Walmart (NYSE:AMT) will exercise these warrants. According to its 10-Q, the exercise price for Amazon’s first and second tranches of warrants is $1.1893 per share. The third tranche, which vests after Amazon buys $400 million worth of product, has an exercise price of $13.81 per share, still very much in the money.
Walmart’s deal on the warrants isn’t quite as attractive.
Its first and second tranches have an exercise price of $2.1231 per share. The third tranche ($400 million in cumulative sales) has an exercise price that’s equal to 90% of the 30-day volume-weighted average share price on the day the second tranche vested.
Amazon had the same calculation, but it’s already hit its second tranche, where Walmart hasn’t.
At the end of September, Amazon had 27.6 million exercisable warrants, while Walmart had 13.1 million. If exercised, Amazon and Walmart would own 6.2% and 2.9%, respectively, with another 70 million to go. If all 110.6 million were exercised — based on 512.2 million shares outstanding — the two customers would own 22% of Plug Power.
Unless I’m missing something, if neither company exercises the eligible warrants before the end of the year, it might suggest a problem exists in the relationship.
That said, I’m probably reading too much into it. It’s merely one of the thousands of capital allocation decisions Amazon and Walmart make each year. They’ll get to it.
While I still like Plug Power a lot, I’ll be keeping an eye on both of these situations in 2021.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
