It’s been an extraordinary year for Plug Power (NASDAQ:PLUG) shareholders, as PLUG stock has surged 112%. The rally of Plug Power stock has been driven by its EBITDA gains. In addition, bullish guidance for the next five years by the company’s management has boosted PLUG stock. However, after the big rally of Plug Power stock, I am neutral on the shares.
For the first nine months of 2019, Plug reported that its revenue had surged 15% year-over-year to $132 million.
The company’s management believes that Plug Power can deliver revenue of $1 billion and EBITDA of $200 million by 2024. Therefore, over the next five years, the company expects average annual top-line growth of 41.6%. In my view, PLUG needs to provide clarity on how that growth will be achieved.
One reason for seeking more clarity is the company’s past record when it comes to guidance. In 2015, Plug talked about becoming a $500 million company by 2020. Given its $132 million of revenue for the first three quarters of this year, that target obviously looks to have been wildly inaccurate. Therefore, I would take its latest guidance with a pinch of salt.
The second reason to be cautious was outlined in my earlier article. Specifically, hydrogen fuel cell adoption has been relatively sluggish globally. I still don’t see any indication that it will accelerate. Therefore, Plug Power might talk about a big total addressable market, but that may not translate into profits.
Equity Dilution and Cash Burn
PLUG stock touched a high of $4 towards the end of November. Since then, Plug Power stock has quickly slipped by 22% and currently trades at $3.12. The key reason for the sharp correction is an offering of 40 million shares of PLUG stock by the company at $2.75 per share.
On a positive note, the offering provided PLUG with $110 million of cash that the company can use to fund its growth. But in the near-term, dilution of the shares may lead to further declines of PLUG stock.
It is also worth noting that, for the first nine months of 2019, PLUG reported that it had used $52 million of cash to fund its operations. It remains to be seen if Plug Power can stop burning cash in coming years.
If PLUG continues to burn cash at the current rate, the company would need to raise cash, either by selling more PLUG stock or by taking on more debt.
Plug is talking about $1 billion of revenue in 2024 with an EBITDA margin of 20%. Last quarter, its EBITDA margin was 1.9%. Even with economies of scale, an 18.1% improvement of EBITDA margins within five years seems challenging.
My Final Thoughts on PLUG Stock
2019 has been rewarding for the owners of PLUG stock. However, I am cautious on Plug Power stock even after the shares’ recent sharp correction. Next year will be critical as it will provide insight on the company’s ability to accelerate its revenue growth.
If the company fails to deliver 30% to 40% top-line growth in 2020, the markets will be disappointed in PLUG stock. I would therefore remain on the sidelines on Plug Power stock. If the company’s top-line growth does accelerate, there will be enough time to invest in PLUG stock and profit from its gains.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
