Plug Power(NASDAQ: PLUG) was considered a promising play on the nascent hydrogen fuel cell market when it went public in 1999. But today, it trades nearly 99% below its initial public offering (IPO) price. Many of its investors retreated after the dot-com bubble burst in 2000; its growth cooled off; and it struggled with accounting issues from 2018 to 2020.
That was a devastating drawdown for Plug's long-term investors, but its stock now trades at just two times this year's sales. Let's review its business model and see if it's the right time to buy, sell, or hold this out-of-favor hydrogen stock.
Image source: Getty Images.
Understanding Plug Power's business
Plug Power generates most of its revenue from its hydrogen-infrastructure solutions and GenDrive hydrogen fuel cell systems. Its two largest customers are Amazon(NASDAQ: AMZN) and Walmart (NYSE: WMT), which both install its hydrogen fuel cells in their forklifts and other ground equipment to reduce their long-term fuel costs.
Plug has already deployed over 69,000 fuel cell systems and 250 fueling stations across the world, and it's the world's largest single buyer of liquid hydrogen. It also develops stationary hydrogen-grid solutions and sells modular-hydrogen generators, liquefaction systems, hydrogen-storage solutions, and transportation equipment.
What challenges does Plug Power face?
Plug Power's biggest challenge has been the sluggish adoption of hydrogen power as an alternative to fossil fuels or battery-powered electric systems. It costs more to produce hydrogen than oil or natural gas, and hydrogen-charging stations are much more expensive to construct than grid-based electric-charging stations.
That's why Plug pivoted from its original plan to develop hydrogen-powered residential systems toward forklifts for warehouses and fulfillment centers. But to lock in Amazon and Walmart as its major customers, Plug actually subsidized its fuel cell sales to the two retailers with stock warrants -- or options to buy more of its shares at a discount.
That agreement turned Amazon and Walmart into Plug's major investors, but it also caused accounting issues when the costs of those incentives eclipsed its customer payments. Plug didn't properly disclose the losses from those incentives, so it had to go back and restate all its financials at the end of 2020 for the previous three years. Following those restatements, its reported annual revenue actually turned negative in 2020.
How fast is Plug Power growing?
Plug's revenue finally grew again from 2021 to 2023, but most of that growth was driven by two acquisitions which expanded its cryogenic-equipment segment. That inorganic growth offset the softness of its core hydrogen fuel cell business, which struggled as the macroheadwinds curbed the market's appetite for new hydrogen-charging projects. But the costs of buying and integrating those new businesses caused its operating and net losses to widen.
Metric | 2021 | 2022 | 2023 | 1H 2024 |
|---|---|---|---|---|
Revenue | $502 million | $701 million | $891 million | $264 million |
Operating Margin | (87%) | (97%) | (151%) | (191%) |
Net Income (Loss) | ($460 million) | ($724 million) | ($1.37 billion) | ($558 million) |
Data source: Plug Power.
Plug's revenue declined 44% year over year in the first half of 2024 as those headwinds persisted, but it expects its electrolyzer, cryogenic, and material-handling segments to all expand and stabilize its growth in the second half of the year. For the full year, the company expects its revenue to come in between a 7% decline and 4% growth. Analysts anticipate a 5% decline to $847 million as it narrows its net loss to $893 million.
But from 2023 to 2026, they expect Plug Power's revenue to grow at a compound annual growth rate (CAGR) of 26% to $1.77 billion as it narrows its annual net loss to $336 million. Plug only had $62 million in cash and equivalents at the end of 2024's Q2, but it recently secured a new $1.66 billion loan from the U.S. Department of Energy (DOE) to build up to six new green hydrogen energy production facilities.
However, that loan will also nearly double its liabilities to $3.45 billion and boost its debt-to-equity ratio to nearly 1.2. Plug also notably increased its number of outstanding shares by 270% over the past five years with its secondary offerings, warrants, and stock-based compensation expenses.
That ongoing dilution, rising debt, and red ink could all make it an unappealing stock to own in this high interest rate environment. That's probably why 26% of its shares were still being shorted at the end of July.
Is it time to buy, sell, or hold Plug Power's stock?
Plug Power's stock looks cheap, and its DOE loan should keep its business alive for at least a few more years, but there aren't any compelling reasons to buy or hold its stock right now. It relies too heavily on Amazon and Walmart; it's trying to boost its sales with margin-crushing acquisitions; and it hasn't proven its business model is sustainable. So for now, I'd definitely sell or avoid Plug Power until it addresses those long-term concerns.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Walmart. The Motley Fool has a disclosure policy.
