The story underpinning Plug Power (NASDAQ:PLUG) stock is strong. And it seems to only get stronger every quarter. PLUG stock has shed its label as a serial underperformer and is now posting impressive growth in an attractive market.
But the question at this point is valuation. After a staggering 655% year-to-date (YTD) rally, PLUG now looks awfully expensive. Even including net cash on the balance sheet, it trades at nearly 40 times its target EBITDA for 2024
In other words, Plug Power could trade sideways for the next four years and it still wouldn’t look cheap.
This dilemma — essentially, growth versus price — is a relatively common one in this market. Investors analyzing so many of the biggest winners of recent years, like Tesla (NASDAQ:TSLA) and Roku (NASDAQ:ROKU), have faced the same argument over and over again. Some, myself included, saw those stocks as simply too expensive.
But with few exceptions, the market has chosen growth. PLUG stock, at least so far in 2020, has been no different. As long as the growth story remains intact, investors remain willing to pay ever-higher prices.
But that sentence also highlights the two core risks going forward. At some point — and we may be approaching that point — valuations will matter. Meanwhile, Plug Power may be a greater beneficiary of the novel coronavirus pandemic than some investors realize.
I’ve been mostly bullish on PLUG ahead of this monster rally. What’s more, I still like Plug Power as a company and see a big opportunity there ahead. It’s just increasingly difficult to believe that the opportunity isn’t already priced in.
The Case for PLUG Stock
From a broad perspective, there’s a lot to like about Plug Power. I wrote a little over a year ago that PLUG stock could soar if the company finally began to fulfill its potential. Now, it has unquestionably done so.
Revenue growth has accelerated. Billings more than doubled in the most recent quarter. Profit margins have followed. It took Plug Power two decades simply to drive a single quarter of positive EBITDA. In Q3, proforma EBITDA totaled $24 million, some 19% of revenue.
The balance sheet has also been improved thanks to a series of equity offerings. The most recent offering raised nearly $1 billion. Plus, PLUG added some smart acquisitions which moved the company into “green” hydrogen. The launch of the GenSure power generation platform adds organic growth potential, too.
However, the YTD rally in PLUG stock, as massive as it is, is not illogical. Plug Power has a huge opportunity, but it has always had that huge opportunity. What’s different now is that the company is finally taking advantage. And so it’s no surprise that investors — finally confident in the company and its management — have jumped on board.
Risk #1: Valuation
But, again, valuation is a significant question mark at this point — 40 times out-year EBITDA is a huge multiple. So is more than 30 times this year’s projected billings of $330 million. That’s a multiple more befitting of a software company with huge gross margins, not a manufacturing company like Plug Power.
Fellow hydrogen play Bloom Energy (NYSE:BE) has also been a huge winner this year, gaining 224%. Like PLUG, BE has gone parabolic of late amid a post-election rush into green energy names. BE stock currently trades at 6.3 times revenue.
Certainly, Plug Power is a better business, particularly given that it’s stepping on Bloom’s turf with GenSure. But I’m not convinced it’s 6 times as good — yet that’s roughly the difference between the two companies’ current revenue multiples.
It bears repeating: valuation has not been a reason to sell growth stocks in this market. But it’s possible that is starting to change, somewhat. Lately, we’ve seen some valuation concerns more broadly, even if stocks like ROKU have avoided those concerns so far.
Risk #2: 2021 and Beyond
Valuation concerns alone probably won’t bring down PLUG stock. However, high valuations lead to high expectations. That might prove to be a larger short- to mid-term risk.
PLUG’s 2020 results have been impressive. But the company has also gotten some help. Its three biggest customers are Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT) and Home Depot (NYSE:HD), all three of which have been enormous pandemic winners. These names have undoubtedly boosted demand for Plug Power’s GenDrive forklifts this year.
So, this company’s 2021 numbers are just not going to look nearly as impressive in comparison. And it’s not just a short-term issue, either. In the Q3 shareholder letter, the company estimated that its customers moved roughly 30% of U.S. groceries for the quarter. That market isn’t quite saturated, but Plug Power already has a big chunk of it.
Now, the move into power generation admittedly does open up a large new opportunity. Regardless, though, Plug Power’s growth is going to slow from the rapid pace it’s been posting recently.
It’s fair to wonder if decelerating growth is priced in after this rally and at these multiples. Again, I’m a bull on Plug Power as a company. But as a stock, at this point PLUG has some real question marks.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.