On Nov. 24, Plug Power (NASDAQ:PLUG) announced that it had raised approximately $1 billion in one of the largest bought deals in the cleantech sector. Selling almost 44 million shares of Plug Power stock at $22.25, the provider of hydrogen fuel cell solutions is building a war chest for growth.
Here’s why that’s a good thing.
Plug Power Stock Has a Few Issues
In my last article about Plug Power, I had a few concerns despite the fact I felt it was a long-term buy.
The first was valuation. At the time of my article in mid-November, PLUG was trading at 31 times trailing 12-month sales and 23 times forward 2021 sales. A month later, it’s trading about 27 times its 2021 sales; it hasn’t got any cheaper.
Up 747.2% year-to-date through Dec. 11, I’m not surprised that my InvestorPlace colleague Josh Enomoto recently suggested that if you’ve got a “sizable position” bet on PLUG stock, you might want to take some chips off the table.
I hear you, Josh.
If you’re not planning to hold for a few years, you’re likely to see it revisit the teens at some point in 2021. For those of you in it for the long haul, put some cash aside to buy more when and if that happens.
The Dilutive Effect
As I stated in November — and this was before the issue of 44 million shares in its bought deal — were the company to see all of the outstanding warrants exercised into PLUG shares, its share count would increase by 46% to 594 million. Add in another 44 million and its shares outstanding would be a stone’s throw from 700 million.
That’s a lot of dilution for a company with $430 million in estimated sales.
Plug Power stated the obvious in its press release for the bought deal:
“We are very pleased with the reception from the institutional investors and the market resulting in a meaningfully upsized capital raise. This ideally positions Plug Power to accelerate the growth of the green hydrogen economy in the United States and globally, a job we wholeheartedly accept,” said Andy Marsh, Plug Power’s chief executive officer.
The raise brings its cash position to $1.7 billion. Based on $700 million in total debt at the end of the third quarter, Plug Power has a net cash war chest of $1 billion to build out its five regional green hydrogen facilities, the first two to be operational by 2022 and the rest by 2024.
While interest rates are meager at the moment, they won’t always be at these levels. This is why businesses of all kinds should be judicious in how they allocate debt. Despite the dilutive effect, up more than 747% YTD, there is no better time to use PLUG stock than right now.
Its shares act as currency at the moment. It’s got to strike while the iron’s hot, in my opinion.
The Hesitant Partners
As I pointed out previously, both Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) hold warrants in the company tied to the amount of revenue generated by each of them. Assuming the exercise of all warrants, together, they would own 22% of the company.
Given how much Plug Power stock’s gained, it does seem odd that they have 40.7 million warrants exercisable at no more than $2.12 per share, and yet they haven’t been exercised.
Together, they’re sitting on approximately $1 billion in unrealized gains. This is cash that Plug Power could use and profits WMT and AMZN shareholders would probably like to see realized.
In Amazon’s case, it has purchased $150 million in Plug Power products since April 2017, which has triggered three of the four equal installments of warrants. Once it hits $200 million in product purchases, the third tranche of warrants will kick in every $50 million in sales with eight equal installments of 2.55 million shares at an exercise price of $13.81.
Overall, once it hits $600 million in revenue, it will hold 34.9 million warrants exercisable at $1.1893 per share and 20.4 million warrants at $13.81 per share for a total cost of $323.2 million.
As I write this, PLUG is trading at $26.24. That means it will have spent $923.2 million, including $600 million of product, to get $1.44 billion in stock.
Not a bad deal if you can get it. Needless to say, to get to the finish line, Amazon has to buy another $450 million of product. That’s a considerable amount still outstanding.
If both companies are so enamored by Plug Power’s hydrogen fuel cell solutions, why aren’t they exercising the warrants? That continues to confound me.
The Bottom Line
So far, I believe CEO Andy Marsh is doing a brilliant job of allocating capital during the company’s massive growth phase.
That said, I am concerned about these two ongoing issues, the latter far more than the former. Until Amazon and Walmart become real partners, it’s something to worry about.
If you haven’t already bought PLUG stock, I would patiently wait for its share price to fall into the low $20s or high teens before buying. After all, it’s still losing a significant amount of money — almost $80 million in the first nine months of 2020 — so the downside risk remains real.
I like it as a long-term hold but only for investors with a moderate to above-average acceptance of risk.
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.