Plug Power: History Of Underdelivering And Lack Of Tangible Results Raise Caution

Thesis

Plug Power Inc. (NASDAQ:PLUG) is a pioneering force in the emerging green hydrogen economy committed to a sustainable future. Despite ambitious plans in the coming years to produce green hydrogen internally to reduce costs and make their business economically viable, a history of underperformance and lack of tangible financial results (especially with gross fuel margins) should keep investors cautious. While I am in full support of the long-term green hydrogen economy and commend their impressive revenue growth, until I see a definite turnaround in some of their financial metrics, namely net income and cash flow, I would advise investors to hold off in investing into Plug Power.

Company Overview

Plug Power focuses on the construction of a robust green hydrogen ecosystem, particularly by utilizing environmentally friendly hydrogen fuel cells to power industrial products such as forklifts and material handling applications. It partners with major distribution corporations around the world such as Walmart, Amazon, and P&G to offer more sustainable fuel systems for their transportation centers and has also begun partnerships with global companies to expand its reach. One of its flagship product lines is the GenDrive proton exchange membrane (PEM) hydrogen fuel cells which offer lower carbon-emitting, sustainable alternatives to batteries through electrolysis. Other than the sale of these cells, Plug also provides services to more easily implement these systems, such as its turnkey package but has still been grappling with profitability in many of these areas, as evident in their recent Q1 2023 report reporting large amounts of negative net income.

Industry Overview

The hydrogen production market is expected to grow by 9.2% until 2030, with demand estimated to reach 500-680 million MT by 2050. This growth can be largely attributed to the rise of ESG-conscious investors, the implementation of stricter worldwide environmental regulations, and the decrease in the cost of many sustainable sources of energy. Renewable sources like wind and solar energy, which cost around $30-$50/MWh, have already gained popularity compared to grid electricity, which costs around $150-$160/MWh. However, green hydrogen still has ways to go, as Plug Power sells its green hydrogen for $5/kg, which translates to around $150/MWh, in line with nonrenewable sources. By 2030, Plug expects to decrease the cost of hydrogen to around $1.5/kg, putting it more in line with other renewables at around $45/MWh.

Potential Growth Drivers

1. Strategic Partnerships and expansion

On June 14, Plug Power announced its plan to reach a production level of 2,000 mt/d globally by 2030, emphasizing that it is reaching an “inflection point” this year. So far, they have aimed for 500 mt/d of green hydrogen by 2025 and 1,000 mt/d by 2028, and have taken their first steps by building a gigafactory in New York and have announced the launch of a liquid hydrogen production facility in Georgia. They also have recently made plans to develop more green hydrogen production plants in Finland to ramp up their global reach and overall production. This expansion hopes to fuel Plug’s ambitious goals of reaching revenue goals of $1.4 billion in 2023 and its long-term target of achieving annual sales of $20 billion by 2030.

In addition to its expansion efforts. Plug has added to its global partnerships by announcing a collaboration with Blue EnerFreeze to introduce a green hydrogen ecosystem into its distribution center, further strengthening its reach in Europe. With prior partnerships with SK Group in South Korea and Acciona in Spain and Portugal, Plug Power will only continue to strengthen its global presence.

2. Internal Hydrogen ProductionOne of the biggest potential catalysts for PLUG in attaining positive margins lies in its ability to create hydrogen internally. This quarter, their PPA and fuel delivered to customers showed significant negative gross margins of -490% and -437%, respectively. PLUG has largely attributed this large negative net margin to supplier disruptions and increased costs of natural gas as of recent, which affects their steam-methane reformation (SMR) based green hydrogen production. By internally creating hydrogen through its own plants, Plug aims to vertically integrate its operations to decrease its operating costs and expects to be able to generate hydrogen at “one-third of the cost [they’re] paying the industrial gas companies”.

Applying a method used by Nanalyze to PLUG’s Q1 earnings at the said 70% (2/3) discount, we observe a substantial increase in gross margins from -33% to +1% for their power purchase agreements and fuel delivery. Annual metrics also improve from -28% to +6% when the 70% reduction is factored in, giving us a glimpse of hope toward positive margins. In the coming year, I suggest investors look out for the realization of the effects of the Inflation Reduction Act’s $3/kg green hydrogen tax credits, development into internal green hydrogen production, and continued growth of water electrolysis for signs of a turnaround in PLUG Power’s financial metrics.

Financials

Looking past PLUG’s negative gross margins, their Q1 2023 report, while a bit underwhelming for an “inflection point”, does have its merits. Plug reported revenue of $210.29 million, surpassing analyst estimates of $207.67 million, and demonstrated an impressive 49% YOY revenue growth in its Q1 report. The growth of net PPE from $500.65mm to now $1302mm LTM in recent years is promising for long-term growth and is reflected by the 67.3% revenue increase from equipment and related infrastructure sales. Despite the temporary cash burn and investment into R&D, this is taking, it does highlight the potential for reaching cost efficacy and economies of scale.

Despite potential long-term revenue growth, PLUG’s overall cash burn and negative income paint a grim short-term outlook. Although EPS improved by 29.63% YOY, it is still sitting at -0.35 as of Q1 2023 (keep in mind this number is lower due to share dilution) and continued negative gross margins drive operational cash burn. Overall, while Plug’s advancements in facilities and capital investments may signal long-term growth, I’m not completely supportive of the idea of an inflection point until the cost of revenue manages to decrease to a reasonable amount and the problems with profitability and cash are resolved.

Risks

1. Share Dilution to Cover Consistent Unprofitability

Currently, Plug Powers’ primary problem lies in its profitability. Despite quite consistent revenue growth and occasional quarters of profitability, PLUG has never reported a year of positive cash from operations in its history of over 20 years. To sustain these operations, Plug has resorted to share-based compensation and secondary share offerings, significantly diluting shareholder value.

Although the dilution has made Plug’s reported negative EPS appear less severe, continuous dilution will likely deter prospective investors, especially if net income eventually turns positive. Despite CEO Andy Marsh’s repeated promises of positive EBITDA since 2011 and even reaffirming 2024 targets last year, management’s continual inability to achieve profitability despite ambitious goals raises concerns.

2. Green Hydrogen Use Resistance

Currently, many large corporations have faced significant inertia in completely adopting sustainable sources of energy due to either existing economies of scale and cost efficiency in oil and coal usage or contractual agreements with such energy providers. As more companies begin to adopt 100% renewable energy initiatives within the next decade or so, Plug Power has the potential to capture a significant portion of the sustainable energy market. However, in the short term, Plug’s future seems more uncertain. For right now, Plug’s offering of green hydrogen remains relatively expensive for regular consumers and homeowners compared to its peers. While it has seen success in automobiles and industrial applications, green hydrogen efficiency is still lower than direct electricity, standing at 68% in fuel production and 33% overall, compared to direct renewable energy 94% in fuel production, and overall efficiency of 77%. Though estimates suggest that green hydrogen will improve its efficiency faster than direct electricity by 2050, my doubts about the commercial scalability of such sustainable sources keep me hesitant to consider Plug Power as a worthwhile short to mid-term investment.

Valuation

While I am optimistic about Plug Power in the long term, using a DCF to value it is challenging due to uncertain cash flow projections, particularly with historically negative EPS. Instead, I opted to use valuation ratios to assess its value compared to historical levels and industry peers.

First, looking at Plug’s LTM P/S, we find it notably higher at 9.95x compared to the industrial sector median of 1.43x. Despite this seemingly unfavorable ratio, based on Plugs’ optimistic and ambitious revenue goals, this P/S ratio could be reasoned to portray investors’ sentiment regarding Plugs’ growth rate. Comparing it to its more historical values, we see that it is relatively discounted off its high in the past year of 29.09x, showing that its price may be reaching a more attractive valuation.

Apart from the P/S ratio, another noteworthy metric is Plug Power’s Price to tangible book ratio. With a ratio of 1.99x compared to the industry median of 2.74x, it suggests that the stock price may have bottomed out, leading to a potentially more attractive valuation and potential progress toward the management’s mentioned “inflection point.” While valuing a long-term horizon on this company will be difficult until net income and EPS turn positive, its more recent valuation ratios signal a potential opportunity to buy at a discount in the future.

Conclusion

While Plug Power presents a fascinating opportunity in the emerging green hydrogen economy, its concerns related to profitability, corporate governance issues, and underperformance must be carefully considered. While a buy recommendation may not be justified at this point, Plug Power’s recent expansions and earnings improvements indicate the potential for long-term growth. During the next quarterly earnings report release, I advise investors to closely monitor whether Plug Power has truly reached the anticipated “inflection point,” as claimed by management.