Hydrogen fuel cells are once again “in” with investors. Accordingly, shares of PLUG stock have surged more than 1,000% percent over the past year. Indeed, that’s some decent capital appreciation, and those still holding this stock may see no reason to sell.
Indeed, as far as growth investors are concerned, Plug Power has everything going for it. It’s a growth play with a green energy underlay. The catalysts underpinning this stock appear to be stronger than ever today, given explicit government investment in the sector. And, Plug Power has announced a couple of intriguing partnerships with SK Group and Renault Group earlier this year.
It appears everything is moving in the right direction for this stock.
However, looking at the company’s chart, something’s gone awry. Investors who bought at the company’s peak have experienced a loss of more than 50% in just a few months.
Accordingly, let’s dive into what’s going on with this stock, and why negative momentum is building.
Accounting Discrepancies Rock PLUG Stock
Since hitting its peak in January, shares of PLUG stock were already consolidating through February. Investors appeared to be concerned with the company’s valuation at the time. Those concerns still remain today, and appear to be providing a significant headwind to this stock.
However, PLUG stock resumed its upward move in early March. By mid-March, shares of PLUG stock moved from around $40 per share toward the $50 level. A turnaround seemed inevitable, and the stock once again regained its momentum.
However, some pretty grim news came on Mar. 16 when the company announced that it would be restating previously issued financial statements for 2018 and 2019, along with quarterly filings for 2019 and 2020.
This happens from time to time, and in many cases, these restatements are non-issues. However, in the case of Plug Power, it appears these accounting discrepancies are material.
Accordingly, this stock has been hit hard once again with another leg down. Today, shares have consolidated between the $30-$35 level, and a strong dichotomy exists between bulls and bears on this stock. Indeed, options prices are factoring in some pretty steep implied volatility with this name. So, investors should be prepared for a wild ride ahead.
Now, let’s look at what these accounting discrepancies were, and why this announcement has moved the company’s valuation in such a big way.
Lease Accounting the Crux of the Issue
It’s important to clarify that the accounting discrepancies did not impact the company’s long-term growth targets, business operations, or massive cash position of around $5 billion. Indeed, the company’s war chest is a source of strength, and a reason many investors consider this stock to begin with.
That said, the key accounting issue at play here is how Plug Power’s lease obligations were structured. The company’s key leasing customer for many years was Walmart (NYSE:WMT). However, Plug Power expanded its leasing business dramatically in recent years. This has resulted in some pretty impressive growth, depending on how these leases are calculated.
In 2018, Plug Power adopted a favorable FASB accounting measure, ASC Topic 842. This allowed the company to recognize revenues and profits from long-term sale and leaseback refinancing arrangements upfront.
By doing this, the company was able to hit its revenue targets and show growth that may have otherwise been spread out over the multiple years of the lease, according to previous accounting standards. This explains the company’s significant revenue growth in 2018 and 2019 with corresponding unit sale increases that didn’t match.
Via an audit by KPMG, Plug Power agreed to adjust revise this accounting method for the previous periods. The company will now report “right of use assets” and “finance obligations” on their balance sheet. The present value of the future lease payments will be used to calculate these line items.
Additionally, it was found that Plug Power previously overstated these line items, and incorrectly allocated cost of goods sold (COGS) to research and development (R&D) expense.
Indeed, these reported accounting errors are material, and the decline in PLUG stock appears to be warranted right now.
That’s not to take away anything from the company’s growth prospects. I do believe Plug Power is positioned well in a growth sector with tremendous momentum.
However, the numbers matter. And how the numbers are calculated can make or break an investor’s financial model for any company.
In this case, it appears Plug Power was following the rules, and no wrongdoing or malfeasance is at play here. However, for investors considering buying this stock today, understanding how the company’s lease obligations are calculated is incredibly important.
The negative signals this restatement sends to the market isn’t good for PLUG stock right now. Accordingly, I have to side with the options market right now. I do think there’s going to be a lot of volatility ahead for PLUG stock.
That can be a good or bad thing, depending on which side of the fence one sits. However, right now, I think investors would do well to sit on the sidelines and see how the next few quarters go before making an investment decision.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.