Plug Power: Worth $1.76 Per Share

Jun. 5.14 | About: Plug Power, (PLUG)

Summary

Plug Power has continually given horrible forward guidance on gross margin and revenue.

I calculate a Fair Value price of $1.60 for the stock using OPTIMISTIC assumptions.

Plug Power stock has at least 60% downside.

Plug Power (NASDAQ:PLUG), as a company, could possibly have a decent future ahead of it. PLUG, the stock, is ridiculously overpriced, and any long-term investor in the stock should get out immediately.

Hope, emotion, and well-meaning "green" feelings will not make a stock worth more than it should be (in the long run). In this article, I will take a more meaningful approach to valuing the stock than many "investors" seem willing to do.

On March 12, 2014, Citron Research published a scathing review of PLUG. If nothing else is taken away from that report, it is obvious that management guidance is overly optimistic. In my valuation of the stock, I will use management's guidance for revenue numbers, but the figures will be adjusted based on what actual vs. guidance was in the past.

"Promises, promises... why do I believe?" - Naked Eyes

Gross Margins

From the PLUG Q1 2009 conference call:

Plug Power will achieve a gross margin percentage in the mid-teens. [for the year 2009]

From a PLUG investor presentation slide in June 2012:

We do expect that both a ramp in shipment volumes and an increase in share of shipments from new product platforms over the remaining quarters of 2012 will boost gross margins into positive territory.

Here is a graph showing the actual gross margins:

PLUG Gross Profit Margin (<a href=

PLUG Gross Profit Margin (TTM) data by YCharts

The "guidance" that this management gives on gross margin is, quite frankly, a joke.

Revenue

From the PLUG Q1 2009 conference call:

Plug Power will generate between mid $40 million and low $50 million in revenue.

From a PLUG investor presentation slide in June 2012:

We're also on track to meet our target of shipping $40 million of revenue in 2012.

Here is the reality of PLUG's revenue history:

PLUG Revenue Chart

PLUG Revenue (TTM) data by YCharts

Dilution

Management even found a way to say one thing and do another regarding share offerings. On February 26, 2014, the CEO said the following:

The balance sheet's been the best it's been since I've been with the company. As of at our announcement in mid-January, after raising $30 million, we have $46 million on the balance sheet. We will use about $10 million in operating cash this year, and we will leave this year profitable, and so we see no need for cash to fund the present business plan.

One week later, the company sold more stock. That really just boggles the mind. It does, however, make great sense for the company; selling when the share price is hyper-inflated is good for the balance sheet. And it is bad for the stock.

PLUG has been diluting its stock mightily for several years, as it has been desperate to raise cash:

PLUG Average Diluted Shares Outstanding (Quarterly) Chart

PLUG Average Diluted Shares Outstanding (Quarterly) data by YCharts

Predictions

To predict 2014 revenue, I will use management's guidance and adjust it according to the kind of disappointment we have seen in the past.

Management has guided revenue figures of $75 million for 2014 and $135 million for 2015. For my valuation, I will lower those numbers by 35% (approximately the amount of previous misses), which equates to assumptions of $48.75 million in 2014 and $87.75 million in 2015.

PLUG has needed to issue new shares at a high rate in order to fund losses, and it is likely that it will need to do so again. For the end of 2015, I will assume 150 million shares.

For the purpose of this valuation, I will assume profits. Personally, I would not bet on this actually happening by 2015, but for the sake of the analysis, it makes sense to do so. I want to show what the valuation of the stock should be, even with an excellent future forecast.

I will assume a profit margin of 6% for 2015. That's net profit, not gross. I am giving PLUG every benefit of the doubt here.

I will assign the stock a P/E of 50 at the end of 2015. If it truly is growing as fast as predicted, then the stock will probably command a P/E around 50.

Going through the above assumptions will give us a per share target price:

  1. PLUG will earn $5.265 million in 2015 (.06 margin x $87.75 million revenue).
  2. Assigning a P/E of 50 to the stock gives a market cap of $263.25 million ($5.265 million x 50).
  3. Finally, we calculate a share price of $1.76 ($263.25 million divided by 150 million shares).

Conclusion

I have been rather optimistic in my valuation of the stock, and my price target still comes out 60% lower than the current price of $4.35.

The future for the stock is quite likely worse than what I have outlined. PLUG operates in an industry that it monopolizes and that is bolstered by government subsidies and incentives (some of which are due to expire at the end of 2016), and the company is still losing money hand over fist. Consider the dilution of the stock, combined with negative gross margins. Money comes into the company and flows out like water down a sewer grate, forcing PLUG to dilute the shares further.

I do think there is a good future for the company IF profitability can be reached. Management needs to get better at giving guidance and the company needs to stop bleeding money, but if those things can occur then PLUG has the capability to grow rapidly. As I have shown from my calculations, however, even if profitability happens as early as 2015, the stock is overpriced because of the tremendous dilution that has already taken place. To justify the current stock price, PLUG would need to:

  1. Become profitable very soon.
  2. Shrug off increased competition and keep around 85% market share.
  3. Manage strong growth without any hiccups.

If PLUG does make it to profitability, what will the competitive landscape look like? The barriers to entry are not large enough to keep other players from entering the hydrogen forklift market. There are several well-run, well-funded companies that can eat into PLUG's market share rapidly, such as Toyota (NYSE:TM) and Still. PLUG can certainly do well, and it has a nice head start, but it would be irresponsible to think that it can hold onto its impressive current market share if/when the landscape turns more competitive.

Anyone holding this stock is simply hoping for an astronomically wonderful future, while glossing over a torrential history of being led down the garden path. I have shown that with very optimistic assumptions, the value of PLUG is under $2 per share currently. I would wait for a large drop or some very good news before buying shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.