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Plug Power: High Valuation Creating Caution among Investors
Stock Analysis & Ideas

Plug Power: High Valuation Creating Caution among Investors

Plug Power Inc. (PLUG) is a hydrogen fuel cell turnkey provider for North American and European electric mobility and stationary power markets.

The main value for PLUG comes from its advanced technology, which is manifested in its proton exchange membrane fuel cell, hybrid battery, hydrogen storage, hydrogen dispensing, and fuel processing systems. In particular, its GenDrive system is highly useful for electric vehicles. The company also offers complementary GenFuel and GenCare systems.

In its most recent quarterly report, PLUG posted mixed results. Revenue surged 76% year-over-year, boosted by 128% year-over-year growth in its fuel cell systems and related infrastructure segment. Meanwhile, product gross margin also expanded by a whopping 600 basis points to 38%.

Another big positive it reported is that Amazon is now a customer of the company’s electrolyzers. Management expects demand for this system to further accelerate in the coming quarters as Walmart, Home Depot, and General Motors are all expected to join Amazon in driving demand for these products.

The downside of the quarter was that higher-than-expected hydrogen and freight costs from the COVID-19-induced supply chain bottleneck pushed the GAAP loss to higher than expected, at $60.75 million. (See Plug Power stock charts on TipRanks)

Valuation Metrics

While the company’s attractive technology portfolio, impressive client list, and incredible growth momentum bode very well for the stock, the main risk stems from its lofty valuation and lack of profitability. The enterprise value is around 30 times the forward revenue and nearly 2,500 times the forward EBITDA. As a result, the stock is clearly richly priced, and the company will have to massively increase its EBITDA margins while also growing revenues at a rapid pace over the next several years to justify its current valuation.

The good news is that its product gross margins are already quite substantial at 38% and have significant expansion momentum, so if the company can successfully scale, it could become a very profitable enterprise. Furthermore, given the impressive list of clients that the company is already servicing, its competitive advantage is clearly strong, so every indication is that it should be able to scale well. With electrification and hydrogen energy technology about to enter a massive growth phase, PLUG is well positioned to benefit.

Wall Street’s Take

From Wall Street analysts, PLUG earns a Moderate Buy consensus rating based on 9 Buy ratings, 4 Hold ratings, and 1 Sell rating in the past 3 months. Additionally, the average Plug Power price target of $44.21 puts the upside potential at 36.11%.

Summary and Conclusions

PLUG is riding strong momentum from rapidly growing demand for electric vehicle and hydrogen energy technology. Furthermore, the company has an enormous growth runway, thanks to its impressive and growing list of clients.

That said, investors would be wise to maintain a healthy dose of caution before going all in on PLUG, given that it is richly valued and its ability to grow into its lofty stock valuation is questionable. Overall, analysts appear to be bullish on the stock, but their opinion is not unanimous, so investors might not want to buy the stock without paying heed to the valuation first.

Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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