Shares of hydrogen fuel cell maker Plug Power (NASDAQ:PLUG) have been hammered amid the recent tech sector meltdown, as a sharp rise in long-term yields has put significant downward pressure on growth stock valuations. From its early February highs, PLUG stock has lost almost half of its value.
That’s a steep drop in a stock that has very strong fundamentals. It’s also a great buying opportunity that will pay off handsomely in the long run.
To be clear, I’m not saying PLUG stock will reverse course right now and surge back to $70. The tech sector selloff is a bloodbath, and bloodbaths like this tend to take some time to shake out.
But, what I am saying is that Plug Power is a disruptive innovator with huge long-term potential, and that relative to that long-term potential, PLUG stock is significantly undervalued today. Indeed, my numbers say shares are worth close to $60 today.
That means that if time is on your side, PLUG stock looks like a great buy at currently depressed prices.
Here’s a deeper look.
PLUG Stock: Hammered on Short-Term Fears
PLUG stock has been hammered over the past few weeks because of fears related to a sharp rise in long-term bond yields. The basic thinking is that, as long-term yields rise, equity valuations will correct lower, because stocks and bonds are competing investment vehicles, so as bond yields rise, the required rate of return on stocks rises, too.
That thinking makes a ton of sense. And if yields were to rise forever, then I’d say growth stocks like PLUG stock will keep plunging.
But yields aren’t going to rise forever. Instead, it looks like the 10-Year Treasury yield will max out around 2% over the next few years.
Here’s the thinking.
Historically, the 10-Year Treasury yield has very closely tracked the sum of the 3-Month Treasury yield (a proxy for inflation which the Fed controls with its target interest rate) plus real GDP growth. This relationship is unmistakably strong. Importantly, the 10-Year yield has historically never surpassed the 3-Month yield plus real GDP growth unless during a time of significant economic contraction (and therefore, negative GDP growth).
The Fed has reiterated multiple times that they will not move on interest rates anytime soon. Thus, the 3-Month Treasury yield will remain near-zero for the foreseeable future. Real GDP growth is expected to jump to 4% this year in a sharp “bounce-back” year. But normalizing out for Covid-19 noise, real GDP growth in 2022 and after is expected to hover around 2%.
Thus, normalized, the 10-Year yield should settle around 2% and remain there for most of 2022 and 2023. We are at 1.5% today. By my math, then, yields have another 50 basis points to go over the next 24+ months. That’s a slow and steady grind higher.
To that end, I think we’re close to the end of the surge in long-term yields. Once the bond market calms down, I fully expect growth stocks like PLUG stock to bounce back.
Plug Power Is Still Leading the Hydrogen Revolution
Ignoring interest noise for a second, Plug Power is still leading the multi-trillion-dollar Hydrogen Revolution.
The world is pivoting toward clean energy. By 2050, we will live in a world powered end-to-end by renewable energies.
One of those core energies will be hydrogen, since it has certain innate scientific advantages from being the lightest element in the universe that render it the most cost-efficient clean energy solution in end-markets where dense, always-on batteries that last forever are particularly useful (think forklifts, long-haul trucks and power for data-centers).
Plug Power is the leader in hydrogen.
The company has been in the game of making hydrogen fuel cells for decades now. Over that time, the company has proprietarily developed the industry’s highest-performing and lowest-cost hydrogen fuel cells.
Plug Power is currently applying these industry-leading fuels cell to the materials handling end-market, where they are powering Walmart (NYSE:WMT), Home Depot (NYSE:HD), and Amazon (NASDAQ:AMZN) forklifts. But, more excitingly, Plug Power is is the early stages of applying this tech into much bigger end-markets, like green hydrogen generation, consumer autos, long-haul trucking, stationary, and more.
Plug Power has already and will continue to find great success in these expansion efforts. That’s because all these end-markets required core HFC technology, and Plug Power has the best core HFC technology in the world.
To that end, Plug Power is morphing into the technological backbone of the entire Hydrogen Economy. I wouldn’t be surprised if, by 2030, thousands of forklifts, trucks, data-centers, and ships are powered by Plug Power’s technology.
Of course, all that means is that the fundamentals underlying PLUG power stock remain robust. This is still an innovative disruptor with enormous long-term growth potential.
Plug Power Stock Has Big Upside Potential
I cannot tell you exactly when the selloff in Plug Power stock will end. But, what I can tell you is that — even after factoring in higher rates — Plug Power stock is significantly undervalued relative to the company’s long-term earnings growth potential.
By 2030, I see Plug Power’s technology powering big segments of the global economy. I imagine the company will dominant the materials handling market, and have sizable market share in the stationary and long-haul trucking end-markets. The company will also be a big player in green hydrogen production.
Calculating the potential in all those end-markets, I see Plug Power’s revenues eclipsing $10 billion by 2030. EBITDA margins should, at scale, settle around 30%, given the company’s favorable pricing power thanks to its huge HFC tech lead.
With those inputs, my valuation model outputs a fair value for PLUG stock today of about $60.
That’s way above where shares trade currently.
To be clear, PLUG stock may not rebound back to those levels right away. But the fundamentals eventually and inevitably always win out. Thus, whenever this stock market bloodbath does end, I do think Plug Power stock will surge higher.
Bottom Line on PLUG Stock
The tech sector meltdown has created multiple great buying opportunities for long-term investors. PLUG stock is one of the best stocks to buy amid this meltdown.
But it’s not the best growth stock to buy on the dip.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon. Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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