Plug Power (NASDAQ:PLUG) announced Q1 earnings last week that provided little excitement. The company reported mostly in line with expectations, while the full-year revenue guidance was above views and encouraging. In my previous article on Plug Power, I was fairly optimistic, but I also noted some uncertainties which make Plug Power a largely speculative play, which is not for the faint of heart. While I was mostly focusing on the downside potential in my previous article, this piece will be more focused on the potential upside (I still believe that the downside should be limited to a $3.00 to $3.50 price range).
Strong bookings growth and FY 2014 and FY 2015 revenue expectations
Plug Power management confirmed the year-to-date bookings of $80 million, and stated that the company should achieve two-thirds of full-year bookings by the end of Q2. The company is also targeting a significant announcement at the end of Q3. These growth trends and the pace of the execution point to potential upside for full-year bookings. The company has also raised FY 2014 revenue guidance from $70 million to $75 million, which was significantly ahead of analyst expectations for $65 million at the time (consensus has moved closer to management's target since the earnings announcement). Plug Power is also increasing its sales staff, and management has increased its 2015 target revenue from $100 million to $135 million for material handling.
As for the profitability, the company should achieve EBITDA breakeven in Q4, while the expected EBITDA loss should be between $0.5 million and $3 million. The ReliOn acquisition is expected to increase the EBITDA loss by $1 million this year, but should have a positive impact on gross margin in 2015 and beyond, as the acquisition provides Plug power with a second source supplier for fuel cell stack technology for its low-power products.
Potential for upside revisions going forward
There are several factors that could push the current revenue consensus for 2014 and 2015 higher. The company is looking to expand in Europe and Asia. The Hyundai Hysco joint venture is expected to be established by the end of July 2014, and we should see a more significant impact on the top line growth in 2015. The increased sales force should also have a positive effect on the growth of the business.
Another possible source of upside revisions is the satisfaction of its customer base. Plug Power has about 20 customers, and 12-15 are repeat customers which are satisfied with the company's products. Two Wal-mart (NYSE:WMT) sites are scheduled to be brought online in Q3, which is ahead of the initial plan for one site in Q2. There may be other customers that might be willing to push up their orders, which might further boost Plug Power's bookings for the year.
On the other hand, Plug Power's CEO, Andrew Marsh, indicated on the Q1 conference call that they hired a new salesperson, who was working with one of the leading battery companies. He said that their sales pitch against Plug Power is that "they are going to run out of business." But given the recent stock offerings and a cash balance of $174 million, this argument now seems invalid and leaves the competition without an important argument to win business away from Plug Power. This fact, together with an increased sales force and geographic expansion should create an opportunity for faster execution and more business opportunities going forward.
Valuation and price target
Plug Power is currently trading at a TTM P/S ratio of 21. While this is a steep multiple, it is a reflection of strong growth expectations going forward. Forward 2014 and 2015 P/S ratios are 8.5 and 5.2 respectively. Since the company is still unprofitable, we should look at the forward valuation metrics to get a sense of the potential share price. Analysts expect the company to generate $0.02 earnings per share in 2015 and $0.14 and $0.22 in 2016 and 2017 (earnings per share data provided by Sentieo.com). Since the company is an early stage of its growth cycle, it is hard to put a price on its growth potential. I believe that there is upside potential north of 50% in 2014, as the company could easily trade at 30x its 2017 earnings, which translates into a price target of $6.60. And as I stated earlier, there is room for upside revisions, which might push the forward valuation lower and the upside potential higher. My price target is not far from Cowen's price target of $6. The firm upgraded Plug Power to outperform, although it lowered its PT from $7.5 to $6.
I previously stated that the downside should be limited to a price range of $3.00 to $3.50, which translates into 18% to 30% downside from the current price.
Catalysts that could push Plug Power higher are:
- New orders from major customers.
- Upside revenue guidance revisions.
- New analyst coverage and upgrades.
Plug Power is certainly not for the faint of heart. This is a highly speculative stock with significant potential upside and downside risks. Given my current expectations, the reward/risk seems in favor of the bulls, as the potential upside of 50% is higher than the 18% to 30% downside. I will be looking for signs of a sustainable bottom and may buy Plug Power in the next couple of weeks.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PLUG over the next 72 hours. 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.