Shares of hydrogen fuel cell company Plug Power (PLUG), which have lost more than half their value over just the past three months, suffered their latest blow on Monday when Morgan Stanley analyst Stephen Byrd resumed covering the stock at a reduced level of recommendation — Equal Weight, equivalent to a Hold.
The new rating is one step down from Morgan Stanley’s previous Overweight (i.e. Buy) recommendation. Meanwhile, the price target, of $35, indicates an 18% upside for PLUG shares.
So why did Byrd do it?
Plug Power has a lot of advantages to its credit, and is arguably the strongest stock in the fuel cell space right now. Listing these advantages, Byrd highlighted the company’s $5 billion in cash on its balance sheet, several “strategic partnerships” with industrial manufacturers around the globe, and its established base of large customers utilizing its fuel cell-powered forklifts for materials handling — names like Walmart and Amazon.com.
More broadly, the analyst sees Plug Power “expanding to serve multiple new markets” in the years to come, notably the transportation market through its partnership with Renault. He predicts that if all goes right, the company could end up “a large-scale, end-to-end hydrogen infrastructure provider” as Plug expands its lead over “newer, smaller competitors” trying to crowd into the hydrogen economy.
Again, if everything goes right, Byrd suggests that the global hydrogen economy — which barely represents a rounding error at present — could reach anywhere from $2.5 trillion to $10 trillion in value by 2050. From a targeted $475 million in gross billings this year, Plug’s part of this economy could total $750 million by 2024, then grow 23% (or more) annually from 2025 to 2030, then 14% (or more) annually from 2030 to 2040, and a further 9% (or more) annually from 2040 to 2050 — ultimately giving Plug Power a market share of as much as 52% “in its various product categories” by the mid-century mark.
And yet, that’s all predicated on a pretty big “if.”
What are the risks, and what are the obstacles keeping Byrd from resuming Morgan Stanley’s Overweight recommendation on the stock? Well for one thing, Plug isn’t yet a profitable business — and never has been. One thing that could go wrong is that sales don’t grow as fast as anticipated if, for example, government subsidies of hydrogen technology turn out to be less generous than hoped for, or competition from alternative forms of renewable energy (wind or solar for example) prove more economical — or rival hydrogen companies prove fiercer competitors than anticipated.
And even if sales do grow as anticipated, Plug must capitalize on this, and wring profits from those sales. This may depend on Byrd’s assumption that Plug’s operating costs will “continue to drop by >10% per year” over the next 30 years. (This is an optimistic projection to say the least).
Will it happen? Will Plug figure out at long last how to earn a profit from its business after decades of trying? Here’s a hint: In establishing his price target for Plug, Byrd posits a valuation of “18x 2023 EV/sales.” Even in a rosy scenario, the analyst is only confident enough to value the company on its sales, not its profit. (To view Byrd’s track record, click here)
Overall, the Street is far more confident than Byrd’s sidelined stance, with TipRanks analytics showcasing PLUG as a Moderate Buy. Based on 14 analysts tracked in the last 3 months, 9 say Buy, 4 suggest Hold, and only 1 recommends Sell. The 12-month average price target stands at $57.08, marking over 90% upside from where the stock is currently trading. (See PLUG stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment