Investors ought to be Cautious about Plug Power

Summary

  • PLUG stocks recently gone up amid the speculation that Home Depot (HD) would convert all of its 100 distribution centers in the United States with GenDrive units
  • PLUG stock price also rose dramatically after Wal-Mart placed an order in February 2014
  • There is a substantial discrepancy between its market capitalization and revenue, for a good reason
    PLUG is a 15 year old company that never had a profitable year in history and investors should take caution before considering to buy this stock

Company Overview

Plug Power Inc is (NASDAQ:PLUG) involved in providing alternative energy technology solutions. It mainly focused on manufacturing hydrogen fuel cell systems that have practical application in the industrial off-road market as well as some stationary power markets around the world.

Plug Power Inc has developed a diversified product portfolio that includes GenKey, GenDrive, GenFuel, GenCare and ReliOn.

Its signature product is the GenKey, which offers an all-inclusive package for hydrogen fuel cell customers. The GenKey solution incorporates GenFuel hydrogen and fueling infrastructure, GenCare aftermarket service and the GenDrive and ReliOn market-specific fuel cell systems.

Another important product of Plug Power Inc is the GenDrive fuel cells. These are used in electric lift trucks as a lead-acid battery replacement. By contrast, the ReliOn is a scalable fuel cell product for the stationary power market.

The Home Depot Saga

On September 21, 2015, Home Depot (NYSE:HD) opened a new distribution facility that will use 172 GenDrive units. As the CEO of Plug Power Inc, Andy Marsh, was invited to the inauguration ceremony of this new Home Depot facility, rumors floated around the investment community that he would be discussing with Home Depot about supplying more GenDrive units for its other storage and distribution facilities around the country.

The rumor was based on a speculation that if Plug Power Inc help Home Depot to convert all its 100 distribution centers, it would generate around $1 billion in revenue over the next 10-year period.

Disconnect Between Revenue vs. Price

Once upon a time, at the height of the dot-com bubble, stocks of Plug Power Inc were trading at $1,500 a piece. Back then, there was a lot of hype around this company that it would revolutionize the energy industry. However, like many hyped companies from that era, looking at you GeoCities and Lycos,Plug Power Inc could not deliver on their promise.

However, like many of its peers, Plug Power Inc did not go bankrupt and over the last fifteen years, it has gradually developed some of the most innovative fuel cell technologies. Its sales team has provided some significant momentum since 2011. But, investors seem to be holding back from trusting this company this time around.

Revenue vs Price

Figure 1: Plug Power Inc Revenue vs. Price, 2000-2015

Since 2000, Plug Power Inc’s revenue has gone up 458.3% and its stock price has gone down 98.7%. That’s a significant discrepancy for any company operating in any sector.

Especially, since April 15, 2015, Plug Power Inc’s revenue has gone up around 148.14% as the shipment of its GenDrive product has doubled. Compared to 419 units of GenDrive being sold during the first quarter of 2015, it sold 888 units in the following quarter. Recently, the company updated its guidance and said that by the end of 2015, around 3,300 GenDrive units will be sold for the year.

Besides the success with marketing GenDrive, the Plug Power Inc management also expects to sell 15 GenFuel units this year.

Altogether, as far as the official guidance is concerned, Plug Power Inc is expected to bring in a revenue of $200 million this year.

With this growth story in the last few quarters, Plug Power Inc’s price to book value remains below 3, currently at 2.5 – up from 2.2 in the last few weeks.

This may make the stock of Plug Power Inc look undervalued, but read on to understand why you should take a second look at this growth story before buying this stock.

Why Investors Should Be Cautious?

In February 2014, Wal-Mart (NYSE:WMT) made an ongoing commitment to convert its material handling fleet with Plug Power Inc’s GenKey solution. The initial order was for 1,738 GenDrive fuel cell units, which were supposed to be deployed over a 24-month period in six Wal-Mart distribution centers, along with a 6-year GenCare service contract for each of the six sites.

By March 7, 2014, Plug Power Inc’s stock price soared to $8.27 per share, which represented almost 400% gain since January 2014.

Every time Wal-Mart made an announcement of buying more products from Plug Power Inc, the stock of Plug Power Inc jumped.

However, compared to its stock price of $1.66 on December 27, 2013, Plug Power Inc’s stock has only gained 23.49% and as of today ((September 24, 2015)), trading at only $2.05 per share.

This 23.49% gain since the end of 2013 after the speculation regarding the Home Depot orders.

Not Profitable in 15 Years

PLUG

Figure 2: Plug Power Inc Net Income History, 2000-2015

The main reason investors should not “buy the idea” that Plug Power Inc has huge upside potential is because this company has been losing money for last 15 years.

Regardless of the recent large scale orders and historic growth in revenue, Plug Power Inc has generated only $0.71 in operating revenue for each $1 of its expenses in the last quarter, where the total net income came out at -$9.23 million.

Conclusion

Yes, the revenues are up, sales team is doing great; there is a huge upside to Plug Power Inc if we believe the official guidance from management. But, revenue alone would not save this company; it needs to convince the market that the recent sales would be sustainable over the long run.

In addition, they need to demonstrate continuous profitability over few consecutive quarters before asking investors to trust their growth story. Not when they are selling stocks to fund operations.

If this was a new company or there was a real turnaround story, we would have considered believing the guidance. But, it is not, Plug Power Inc has been around the block when people had their personal websites on GeoCities and Bill Clinton was relevant. Savvy investors would know better not to chase a stock based on speculation that has no underlying fundamentals to deliver sustainable growth and profitability in the long run.