The Bear Case Continues to Widen for Plug Power

Environmental, social and governance (ESG) stocks have thrived during the Covid-19 pandemic outperforming the broader market. Hydrogen fuel cell provider Plug Power (NASDAQ:PLUG) is capitalizing on the heightened investor enthusiasm for ESG stocks. In the past, we have seen how Plug Power stock has grown in such favorable conditions, only to disappoint investors with its performance.

a symbol with H2 (hydrogen) on it and a fill-up tank
Source: Alexander Kirch /

It’s more than natural to feel skeptical about its current 704% year-over-year surge, which has blown its valuation out of proportion.

With a relatively strong third quarter showing and the management’s promise of unabated near-term growth, it promises a better outcome this time for the company.

However, there is more than what meets the eye with Plug, which compels me to be bearish about it at this point.

Plug Power recently raised a massive amount of cash through its equity offering of 38 million common shares. The company plans to raise $845.5 million from the stock sale, which will help in reducing its substantial debt load. Moreover, it dilutes existing shareholding by over 7%. However, stock dilution has been a recurring theme for the company, as its shares have grown by 8,000% in the past 20 years.

A Major Risk is Looming

Plug Power stock had better-than-expected results in the third quarter, which reaffirmed the positive investor sentiment. Revenues were up 80% to $107 million from a year earlier. Gross billings also increased by double digits to $125.6 million. Moreover, adjusted EBITDA was at a healthy $24 million with consolidated margins of 17.2%. Gross margins are fast approaching long-term targets of 20%.

Full-year guidance for gross billings is up by $25 million to $30 million from $300 million at the beginning of the year. Moreover, with the recent stock sale, unrestricted cash rose to $448.1 million, up from $139.5 million. The new equity has materially improved the company’s weak balance sheet.

Furthermore, the company has deployed 12 hydrogen fueling stations and 4,100 fuel cell systems in its most recent quarter. Additionally, it is also working on developing five hydrogen plants in the U.S. and its key partners. These plants will be complete by the end of 2022.

However, there is a significant risk that Plug’s investors need to be wary of in the near-term. At least 70% of the company’s revenues are from retail giants in Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT). Plug had struck a deal with both companies giving them warrants to acquire its stock in exchange for purchase orders.

The deal is one of the main reasons for the meteoric rise of Plug Power stock. Amazon has reached its last tranche of shares, which provided it with the incentive to purchase the stock at a $1.19 strike price. However, Walmart is still a long way off from exhausting its warrants agreement. Therefore, the company should witness a considerable decline in revenues from Amazon in 2021.

Unrealistic Valuation

One of the big problems with Plug and many of its peers are their outlandish valuations. Plug has a price-sales ratio of 32.6, which is significantly higher than the renewable energy industry average of 4.4. That number is unfathomable considering how the company has never turned a profit and has consistently posted negative cash flows.

On the flip side, the company’s 10-year median P/S ratio is at 3.44. If we consider this figure, its stock price should be significantly lower than it is now. I feel that the unsustainability of its agreements with Walmart and Amazon will become more apparent next year. Even if the management can achieve its future revenue targets, the current stock price remains unreasonable.

Final Word on Plug Power Stock

Looking at Plug Power Stock’s rampant rise this year makes me wonder whether it’s deja vu. You see the stock rising amidst elevated investor enthusiasm surrounding ESG stocks, and then it plummets to the ground. I feel when investors wake up to the reality of the Plug’s key contracts with Amazon and Walmart, the stock should be back where it belongs. For now, it trades at an unusually high price, which is unjustifiable at this time.

Avoid Plug Power stock for now.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article

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