Plug Power shares have risen nearly 40-fold and the company has a market cap of $1.2 billion despite 12 years of losses.
It is unclear why PLUG's future will be brighter than its past.
PLUG trades at 3-9x the valuation of its closest peers.
Giving PLUG credit for its cash balance, its deferred tax assets, and its core business, the author sees downside of 85%.
Plug Power (NASDAQ:PLUG) shares have had an incredible run, up nearly 40-fold in the past year. While investor sentiment has clearly turned positive, there are few pieces of hard evidence to support PLUG's $1.2 billion valuation. Though I have searched, I have been unable to understand why investors have become so enthusiastic about PLUG shares. I have several questions for bulls, including:
- Given that PLUG has had Wal-Mart (NYSE:WMT), FedEx (NYSE:FDX), and Daimler as customers for several years and has lost $96 million (at the operating profit line over the past 3 years), why do investors seem to believe (as evidenced by share price movement on March 25) that the potential announcement of a global automaker would dramatically alter PLUG's fortunes (as implied by a $400 million increase in market capitalization)?
- As noted by Citron and Kerrisdale, PLUG management has failed to deliver (by a large margin) on revenue projections in the past. Why do investors believe that management will be able to deliver on such promises in the future?
- What are PLUG's unique competitive advantages? Why haven't these advantages allowed the company to earn a profit in the past twelve years?
- At a $1.1 billion enterprise value ($1.16 billion market cap less $60 million in cash), PLUG trades at 41 times trailing revenue. A $1.1 billion enterprise value implies PLUG should be earning an operating profit of $80-100 million within the next 2-3 years. Given that PLUG generated $27 million in revenue last year (and lost nearly $30 million at the operating income line), how likely is this?
- Why does PLUG trade at such a huge premium to other publicly traded companies involved in the fuel cell sector? While PLUG trades at 41x trailing revenue (or 34x adjusted for the recent Relion acquisition), Ballard Power Systems (NASDAQ:BLDP) and FuelCell Energy (NASDAQ:FCEL) trade at 9 and 3 times trailing revenue. If PLUG's multiple were to trade at these levels, it would imply 70-85% downside. What makes PLUG a superior business to Ballard and FuelCell?
- If PLUG is such a fast-growing company (as implied by its huge valuation relative to sales), why hasn't PLUG been able to grow revenue for the past three years?
- Given that PLUG has a history of losing money, over promising/under-delivering, and diluting shareholders, what would cause bulls to become less constructive on the name?
Frequently comments by bulls note something to the effect of "Apple (NASDAQ:AAPL) was once a small company that traded at a high valuation, but if you would have shorted it, you would have gotten burnt." While this is true, it is important to note that: (1) Apple was profitable almost instantly (earned ~15% operating margins in early 1980s) (2) Apple grew revenue at a rapid clip for several years (40-60%) (3) Apple never traded at 34x revenue (in fact, Apple traded at 3-5x trailing revenue for most of the early 80s). It is entirely possible that PLUG will never be Apple and should not be valued at a 9-10x premium to it (rather a meaningful discount would be much more appropriate).
Another frequent comment I have seen in threads of articles written by authors who have taken a short position in PLUG is that the author is simply writing the article because he is short. This implies that the author picked a stock at random, shorted the stock, and then wrote a negative article because the author shorted the stock. As a long-short manager, I feel the obligation to tell you that I nor anyone I know operates in this fashion. When I short a stock, I short it because based on the research I have done, I believe the stock is materially overvalued. PLUG is no exception - here is why I have shorted the stock:
- Long history of losses - nearly $900 million over the past 12 years. I have little reason to believe the future will be brighter than the past.
- Long history of over-promising/under-delivering.
- No meaningful revenue growth. No evidence that the company has a profitable business model.
- No reason to believe that there is any unique intellectual property which makes it likely that the company will meaningfully grow revenue or earn profits in the future. Should the fuel cell market take off, I see no evidence that PLUG is a leader and will garner a strong share of industry profits.
- Massive overvaluation on an absolute and relative basis as noted above.
- Likelihood that Air Liquide will sell its 10 million shares next month putting downward pressure on the share price.
What is PLUG's fair value?
While many momentum names have recently declined meaningfully in price, PLUG shares remain in the stratosphere. Given that PLUG has never earned a profit (and I have no reason to believe it will generate profits in the future), I have valued PLUG using a sum-of-the-parts analysis. The parts consist of cash (I estimate PLUG will finish 2014 with ~$45 million in cash), deferred tax assets (by the end of 2014, PLUG will have lost $900 million over the past 12 years which will allow it, or more likely, a successor company to shield $300 million in future profits), and a multiple of estimated 2014 revenue on its fuel cell business. Here is my analysis:
Estimated 2014 Cash Balance
valued at 70% of $45 million
Deferred Tax Assets
valued at 30% of $300 million
Core fuel cell business
valued at 80% of $40 million
Total Value to PLUG Equity holders
Shares outstanding (after warrants)
Value per share
In my view, PLUG's most valuable asset is actually the ability to shield taxes due to its history of heavy losses. That said, it will be very difficult to make a full and timely use of these assets. As such, I have taken a heavy haircut (70%). PLUG will likely finish 2014 with $30-45 million in cash. I used the high end ($45 million) as my starting point but took a 30% deduction as it is likely that PLUG will continue to burn cash beyond 2014. Lastly, I assume that PLUG will be able to grow 2014 pro-forma revenue 25% over 2013 (revenue pro-formed to include Relion acquisition). PLUG paid 80% of revenue for Relion (though it paid it in stock and I believe the stock is significantly overvalued) and I've used the same multiple to value PLUG's core business. This gets me to roughly $1/share in fair value, implying over 85% downside.
Investors need to only look to the 3D printing sector to see what can happen when shares go from being loved (a couple months ago 3D printing companies sold at 15-50x revenue) to being less than loved (now most sell for 5-10x revenue) which resulted in share price declines of 50% for 3D Systems (NYSE:DDD) to over 80% in the case of Voxeljet (NYSE:VJET).
Investing in 'the next big thing' can be a dangerous road. Do your own research and invest wisely.
Disclosure: I am short PLUG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long AAPL. I am short DDD and VJET.