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Summary

  • Plug Power's share count continues to increase significantly, with the effect of lowering the top end potential of its share price.
  • A $5 billion Plug Power in 2027 may only translate into a 7% to 11% CAGR for current shareholders.
  • The improved balance sheet does increase Plug Power's value in a solid growth scenario to nearly $3.
  • Increasing share count and cash balance should lead to a lower ceiling and higher floor for its share price.

Plug Power (NASDAQ:PLUG) has been continuously increasing its share count over the last couple years, with shares outstanding rising from 38.2 million at the end of 2012 to 144 million at the end of March 2014. The recent share offering could potentially bring this to 167.1 million shares, and 191.2 million shares fully diluted.

I do believe that the latest equity offering is a good move for Plug Power as a company as it significantly strengthens its balance sheet. However, the additional dilution also has the effect of narrowing Plug Power's range. Citron Research's fair value price of $0.50 per share is now too low with Plug Power potentially having up to $1.22 per share in cash. Similarly the high end of Plug Power's potential valuation is limited by the increasing number of shares. Bigger Capital's musings about Plug Power becoming a $10 billion company 10 to 15 years down the road now translates into just over $50 per share, and that is likely to keep going down as more shares are added.

The Growth In Shares

Plug Power went from 38.2 million shares outstanding at the end of 2012, to 106.2 million shares at the end of 2013, to 144 million shares at the end of March 2014. Add on the 530,504 shares from the ReliOn deal and the 22.6 million share offering, and the number of shares outstanding will reach at least 167,089,265 by the end of April 2014.

Date

Shares Outstanding

December 31, 2012

38,238,858

May 2, 2013

64,036,405

August 12, 2013

80,801,897

December 31, 2013

106,190,652

March 31, 2014

143,958,761

Add: ReliOn Deal

530,504

Add: April Offering

22,600,000

April 30, 2014

167,089,265

With outstanding stock options, warrants, convertible preferred shares, restricted stock units, and the underwriters' option for an additional 3.39 million shares, there is the potential for an additional 24.1 million shares to be added to Plug Power's outstanding share count in short order. This would bring the total number of shares outstanding to potentially 191.2 million.

Date

Shares

Underwriters' Option

3,390,000

Stock Options

4,785,485

Restricted Stock Units

650,002

Air Liquide Convertible Preferred Shares

11,065,880

Outstanding Warrants

4,250,490

Total

24,141,857

As well, Plug Power's Board of Directors recently approved changes to Plug Power's Stock Option and Incentive Plan. If approved by shareholders, this will increase the number of shares potentially issuable under the plan by 10.5 million.

Looking At A Very Bullish Scenario

As mentioned before, one of the most optimistic musings about Plug Power came from Bigger Capital. It envisioned a scenario where Plug Power could become a $10 billion company in 10 to 15 years. With all the additional shares however, the upside for Plug Power shareholders becomes increasingly limited. Even if you assume that Plug Power can actually become a $10 billion company (there is a tremendous amount of execution risk along the way), the high number of shares outstanding translates into a share price that is probably lower than most shareholders anticipate. If Plug Power becomes only a $5 billion company (which would be a strong achievement in itself), the CAGR for the share price isn't even very high anymore.

With shares outstanding increasing from stock options and awards along the way, what is currently up to 191.2 million shares outstanding (fully diluted) may easily turn into 250 million shares 10 to 15 years from now without additional capital raises. With potential acquisitions, additional capital raises, etc..., Plug Power could even end up with 400 million shares by that time.

Below is a chart that shows what a $5 billion company and a $10 billion company looks like in terms of share price depending on the number of shares outstanding. With 250 million shares, a price of $40 per share would equal a $10 billion company. With 400 million shares a price of $12.50 per share would equal a $5 billion company.

Shares

$10 Billion

$5 Billion

250,000,000

$40.00

$20.00

300,000,000

$33.33

$16.67

400,000,000

$25.00

$12.50

The other factor to consider is the long-time horizon needed to achieve those values. If these values are reached in 13 years, a share price of $12.50 only translate a CAGR of 6.7% from current prices, while a share price of $20 indicates a CAGR of 10.6%. While those aren't poor growth rates, it does indicate that there is a high possibility of long term share price growth rates near the market average even in a very optimistic scenario where Plug Power delivers strongly on its revenue potential and makes tremendous margin improvements.

Shares

$10 Billion

$5 Billion

250,000,000

16.7%

10.6%

300,000,000

15.1%

9.1%

400,000,000

12.6%

6.7%

If dilution continues in future years, the chance for long-term shareholders to get outsized returns on their investment from this point in time are limited even with very strong revenue growth.

What Is Plug Power's Downside If It Demonstrates Some Growth?

On the other hand, the recent moves have been excellent for Plug Power's financial health, as well as giving it additional experienced workers necessary for a growth push. If the underwriters exercise their option in full, Plug Power would have approximately $200 million in cash. If the stock options, convertible preferred shares and warrants are also fully exercised, Plug Power would end up with approximately $234 million in cash. This is a marked contrast to last year, where Plug Power was forced to sell 18.9 million shares at $0.15 for enough cash to keep its business running for a few months.

As Plug Power may potentially end up with up to $1.22 per share in cash, this would make Plug Power's floor significantly higher than Citron Research's $0.50 price target, as long as Plug Power can avoid disastrous losses.

Kerrisdale Capital Management recently outlined a reasonable growth scenario that I would consider a good one for bears to use. That scenario assumes that Plug Power will not meet its bookings targets in upcoming years (and Kerrisdale Capital Management notes Plug Power's mixed track record of meeting guidance in the past), but also allows for Plug Power to display solid growth in revenue and strong improvements in margin over the upcoming years. This is actually a fairly positive scenario for Plug Power, but also one that outlines how Plug Power is overvalued without exceptional growth.

Kerrisdale Capital Management concluded that Plug Power had a value of $2.44 per share in that scenario. The changes to cash and share count from the recent equity offering plus effect of the potential exercise of the underwriters' option and exercise of various other options, warrants and preferred shares would make Plug Power's value potentially $2.94 per share now using Kerrisdale's model.

Conclusion

The recent equity offering is a good move for Plug Power as a company, and puts it in quite improved shape compared to when it was selling shares for pennies to raise cash last year. However, the increasing share count makes even a $5 billion Plug Power in 10 to 15 years worth only market average gains for long-term shareholders. Conversely, the improved balance sheet does increase Plug Power's value in a more moderate growth scenario to nearly $3. As long as Plug Power can at least partially deliver on its guidance it will likely remain above that level.

Source: Plug Power: Slowing The Roller Coaster Ride

Additional disclosure: I had sold Plug Power calls that expired on April 25. May initiate another position next week.