tiprankstipranks
Plug Power Must Deliver Results to Justify Valuation
Stock Analysis & Ideas

Plug Power Must Deliver Results to Justify Valuation

Plug Power (PLUG) is a leading provider of clean hydrogen and zero-emission fuel cell solutions with a focus on being cost-effective and reliable. Plug Power has developed alternative energy technology to provide energy to electric vehicles, stationary power markets, and other business solutions that need clean power to perform.

I consider Plug Power to now have a lofty valuation that is disconnected from its real business and financial performance. As a result, I am bearish on PLUG stock. (See Analysts’ Top Stocks on TipRanks)

Building a Green Hydrogen Economy

Plug Power has the bold vision of building a green hydrogen economy. On its website, the company states, “Fuel cells are an economically-viable, sustainable power solution, solving important business challenges by providing enhanced productivity and uptime.”

Shares of this alternative energy company have gained about 56% over the past month, outperforming the S&P 500’s gain of about 7% in that time. Year-to-date, PLUG stock has gained approximately 18%.

The company operates in the Hydrogen Generation market, which is expected to grow at a compound annual growth rate of 9.2% from 2020-25. This would value the market at $201 billion at the end of the forecast period. The growth of the market is driven mainly by the government regulation of greenhouse gas emissions.

At the same time, the hydrogen economy has several restraints. To begin with, a high level of capital expenditures is required for hydrogen energy storage. In addition, the lack of infrastructure for electric cars that would use hydrogen as their main fuel poses challenges for the adoption of the technology.

Potential Catalyst

There is one major catalyst that is favorable for Plug Power. The United Nations climate conference, COP26, in Glasgow, Scotland, is organized from 31 October – 12 November 2021. Why this is important news for Plug Power now?

This United Nations climate conference, COP26, will bring a lot of parties together to accelerate action towards fighting climate change. The motto of this climate conference is, “UNITING THE WORLD TO TACKLE CLIMATE CHANGE.”

A lot of nations will address important issues such as clean power, the transition to zero-emission vehicles, and electrification. In this context, fuel cell stock Plug Power may continue to perform better than the broader stock market on high expectations about important decisions.

But we must not forget that the stock market is a discounting factor of all present and future news. This means that unless Plug Power can deliver better than expected earnings in mid-November 2021, its stock price may pause its one-month rally.

Optimism for Long-Term Guidance

One of the most important factors investors weigh before investing in a stock is the management and the performance of the company. Any sign of optimism about the company’s business outlook is considered very positive news. On the other hand, management of a publicly-traded company will rarely not be optimistic.

Nonetheless, management is aiming for $3 billion in annual sales by 2025. In addition, it updated sales guidance to $825-850 million, 65% growth over 2021. The company hopes to achieve these targets through its agreements and strategic partnerships.

Fundamentals Reveal Several Red Flags

In general, Plug Power has a very strong balance sheet, with a current debt-to-equity ratio of 0.15, and a cash-to-debt ratio of 6.4.

What concerns me are several important financial metrics. The revenue growth that was strong from 2017-19 turned negative in 2020. The operating income of Plug Power has been negative as of 2016, making it an unprofitable company.

Net losses surged to $596.16 million in 2020 compared to a net loss of $83.74 million for 2019. Plug Power is also burning cash, as it has reported negative free cash flow for years 2016-2020.

In 2020, there was a huge stock dilution thanks to a $1.3 billion sale of common and preferred stock. I also noticed an increase in the trend of SG&A expenses, as well as an unstable trend for capital expenditures.

I argue that more capital expenditures will be needed to support the commercialization of hydrogen fuel cell products. With no sign of reaching profitability yet, the stock has a lofty valuation.

Furthermore, in the past three earnings reports, Plug Power missed expectations. It will have to deliver very strong earnings going forward to justify its current valuation.

Wall Street’s Take

Turning to Wall Street, Plug Power has a Strong Buy consensus rating, based on 13 Buys and three Holds assigned in the past three months. The average Plug Power price target of $44.40 implies 11.6% upside potential.

Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of Tipranks or its affiliates, and should be considered for informational purposes only. Tipranks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. Tipranks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by Tipranks or its affiliates. Past performance is not indicative of future results, prices or performance.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles