There’s something important to keep in mind when it comes to Plug Power (NASDAQ:PLUG) stock. Plug Power is not a new company, and hydrogen fuel cells are not a new technology.

Plug Power was founded back in 1997, and went public two years later. It has never come close to net profitability. Hydrogen fuel cells, meanwhile, have been around in some form since the 1800s.

That history doesn’t mean Plug Power has no chance of succeeding. But it does undercut the simple bull case for PLUG stock as a slam-dunk, no-doubt-about-it winner amid the shift to greener technologies.

Too many investors bought that bull case, particularly as PLUG stock soared to an unsustainable valuation this year. Shares since have crashed, which to those investors (and others) might seem like a buying opportunity.

I’m far from convinced that’s the case, however. PLUG is off 63% from January highs. But it’s still up 551% just over the last 12 months. And, as we shall see, valuation remains a concern even after the pullback.

All told, this looks like a logical correction, not an opportunity. Plug Power still has more work to do, and PLUG stock might still have more downside ahead.

The Hydrogen Question

Hydrogen certainly has real promise.

Fuel cells create minimal emissions and no greenhouse gases, fulfilling a key goal of governments and private enterprises.

Hydrogen is renewable, giving it an obvious edge over fossil fuels. That even makes fuel cells preferable, environmentally speaking, to battery-powered electric vehicles. At least for now, those EV batteries have to be charged using electricity often generated from natural gas or even coal.

There are two core drawbacks. The first is that hydrogen production remains a hugely energy-intensive process. The energy required for production through electrolysis can offset most or all of the environmental benefits of hydrogen as a fuel.

The second issue is cost: power from fuel cells generally is not yet competitive with other energy sources.

Plug Power is trying to fix these problems. A pair of acquisitions last year positioned the company as a leader in so-called “green hydrogen,” which uses renewable energy for electrolysis. And the company’s projected growth should drive economies of scale that bring costs in beyond its core forklift business.

But on both fronts, Plug Power has a lot of work left to do. The company itself only is targeting 50% green hydrogen by 2024. And its business beyond forklifts remains immaterial — so far.

The Margin and Accounting Problems

Certainly, Plug Power has a chance of succeeding on both fronts. If it can do so, there’s a big opportunity.

But it bears repeating: We don’t yet have much evidence that the company can succeed.

More than two decades after its founding, Plug Power still isn’t profitable on a net basis. It’s not particularly close, either, even if you adjust out non-cash charges relating to warrants on PLUG stock. Free cash flow in 2020 was negative $179 million.

A big part of the problem is that Plug Power’s sales so far just aren’t that profitable. For 2021, the company has guided for gross margins below 20%. Operating expenses are supposedly to move sharply higher year over year.

And that guidance came before Plug Power dropped a bombshell last month.

The company is restating three years’ worth of financial reports. The restatement isn’t going to change overall profit numbers, or impact the cash on the balance sheet. Let’s be clear: Plug Power is not a fraud.

But one thing the restatement will do is increase cost of revenue. Put another way, it will decrease gross margin.

So we have a company whose reported margins already don’t look high enough. In fact, they’re likely even lower than we thought. That’s a real problem given that Plug Power still has a market capitalization over $13 billion.

PLUG Stock Isn’t Cheap

That $13 billion figure admittedly includes about $5 billion in cash.

But that still leaves an $8 billion valuation on a company that generated $337 million in billings in 2020. (Plug Power’s revenue actually was negative, though that too is due to accounting vagaries related to the warrants.)

If you look out to the company’s targets for 2024, valuation does get a bit more reasonable — though it’s still high. Of course, investing solely based on management projections is a good way to get in trouble.

The fact is that even after the pullback, PLUG stock is still pricing in an awful lot of success. Plug Power hasn’t yet proven it can create that success, while the accounting news raises its own worries.

Yes, PLUG has plunged. In the context of the restatement and the trading that preceded it, it probably should have.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

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