Plug Power Isn’t Worth the Trouble Without a Path to Profitability

Stocks to sell

Alternate energy is all the rage these days. Not a day goes by when you don’t hear about a new company hoping to position itself as a unique player in an already bloated renewables market. In this crowded field, Plug Power (NASDAQ:PLUG) and Plug Power stock remain a spec play that you can live without.

a symbol with H2 (hydrogen) on it and a fill-up tank

Source: Alexander Kirch / Shutterstock.com

With a year-to-date return of 683.5%, you might be scratching your head. But hear me out.

Plug Power is an innovator of modern hydrogen and fuel cell technology. It helps serve certain niches. However, Tesla’s (NASDAQ:TSLA) heavy interest in lithium-ion batteries represents the biggest threat to PLUG stock. Unfortunately, batteries are ruling the clean energy transportation space.

Unless there is a massive pivot, the momentum is lost. Being the long-term winner in the fuel cell industry doesn’t mean much. If you are invested in Plug Power stock, you should understand this.

What Are the Catalysts?

There are three reasons why PLUG stock is rising. As represented by the iShares Global Clean Energy ETF (NASDAQ:ICLN), alternative energy stocks have outpaced the broader market, posting a total return of 98.2% compared to the SPDR S&P 500 ETF Trust’s total return of 16.1% year-to-date.

Meanwhile, President-Elect Joe Biden outlined an aggressive $2 trillion plan to escalate clean energy in the transportation, electricity and building sectors. It’s a marked contrast to President Donald Trump’s attitude toward the virus and climate change.

Regardless, the bottom line is that alternate energy stocks are becoming excellent investments. That has pushed several stocks to unprecedented levels, with no effort on the companies themselves.

Secondly, while several businesses burn through cash and report abysmal earnings, Plug Power managed to report an excellent third quarter, with gross billings of $126 million, a 106% year-over-year increase.

It revised its forecast for the year to between $328 million and $310 million, with 2021 gross billings projected at $450 million. That was enough to make Plug Power stock skyrocket and analysts to take notice.

Fact Over Fiction

While there’s a lot of hoopla surrounding the company’s success, the fundamentals reveal a different story. Although gross billings grew, the company lost an incredible amount of cash to fuel this growth.

That’s why, despite an increase in revenue, you end up with a net margin of negative 33.7%. Another problem is that the company is still in its growth phase. Despite being founded in 1997, it constantly needs finance to fuel its plans.

Just as an example, Plug Power is now planning to build its own gigafactory to make PEM stacks for electrolyzers and fuel cells. CEO Andrew Marsh hopes the endeavor will bring in roughly $2 billion in additional revenue. The initiative is part of the company’s green hydrogen network, for which it raised approximately $1 billion through issuing 44 million shares.

However, this is a company that has never generated positive free cash flow. Out of the last 12 quarters, it consistently disappointed, with its latest EPS figure underperforming analyst estimates by 83.3%.

That’s not to say that I believe the company is a lost cause. Plug Power estimates the global market-size of material handling stands at about $30 billion. It’s estimated that there are 6 million forklifts deployed in the field. That’s a sizeable market for the company to exploit. And other small niches offer profits and sustainable revenue streams as well.

But this doesn’t compare in any shape or form to the broader EV market. The global electric vehicle market was valued at $162.34 billion in 2019 and is expected to reach $802.81 billion by 2027, a CAGR of 22.6%.

Plug Power Stock Doesn’t Have Much to Offer

Despite the factors outlined, Plug Power stock trades at 25.2 times forward price-to-sales. To put things in perspective, the industry trades at 1.4 times, while the S&P 500 trades at 2.7 times. It’s doing well in smaller markets like materials handling, but the premium at which it’s trading is unreasonable.

Lithium-ion batteries are starting to gain traction, with Tesla leading the charge. Plus, billions of dollars are being pumped into research, so expect battery technology to get cheaper and more effective moving forward.

As a parting note, I also believe the time is coming when valuations in certain sectors will start returning to normal. Several vaccines will come to the market in the coming months. That will cool off stocks for whom the pandemic was a tailwind.

Now, renewables will always be excellent investments. The push toward a carbon-neutral future is a secular trend. However, that doesn’t mean that every company in the space is a gold nugget. Plug Power is currently valued at $10.29 billion, a valuation that doesn’t make sense, considering the headwinds it’s facing.

Plug Pwer stock is a sell for me.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan is a contributing author for InvestorPlace.com and numerous other financial sites. A former data journalist at S&P Global Market Intelligence, he’s passionate about helping retail investors make more informed decisions regarding their portfolio.

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