Trading volume in shares of Plug Power (NASDAQ:PLUG) has declined considerably in the past month, which may be a welcome sign after the turbulent movements in the prior five months. This may be a consequence of the lack of new catalysts on either the bull or the bear side, so it is normal that indecision is the theme for Plug Power's investors and traders. This will probably be the case in the next few weeks, as most of the investing world will probably wait for the Q2 earnings report, which will probably come in mid-August. In the meantime, the situation may be setting up for a substantial short-squeeze, as the short interest has ballooned to 35 million shares (23.2% of free float), and the declining volume may be an added factor for intensified short covering, since it would take more trading days for the short to cover their positions.
The latest news failed to bring excitement in the bull camp. FuelCell Energy (NASDAQ:FCEL) delivered a disappointing Q1 report last week, and Plug Power and Ballard Power (NASDAQ:BLDP) moved lower in sympathy, although the volume on the decline was below average. FuelCell missed EPS and revenue estimates as expenses rose and losses widened. Q3 revenue guidance was in-line with analyst estimates. The initial market reaction was quite bad, sending shares down to $2.01, but the stock has recovered since the earnings announcement, and is up 6% from the early June lows. Plug Power and Ballard Power are off less than 10% since FuelCell's announcement, and they may need more time to consolidate after the sharp selloff in the last three months. This is most often the best thing a stock can do, as it tends to weed out the quick profit traders and impatient short sellers, leaving the shares in "firmer hands."
On the positive side, Hyundai (OTC:HYMLF) launched its first hydrogen fuel cell powered SUV in California on June 10. Although the lack of infrastructure and the high cost of building hydrogen-fueled cars are serious constrains, this is a positive development for the fuel cell technology. The new Hyundai Tucson has a 265-mile driving range and "compares favorably to plug-in battery electric cars." It takes about 10 minutes to refuel. The early adopters have unlimited free hydrogen refueling and free maintenance service at three participating dealerships in Southern California. So, the hydrogen fuel space is certainly getting more attention lately. Toyota (NYSE:TM) is already having a hot debate with Tesla Motors (NASDAQ:TSLA), as the two companies have opposing views on the future of electric cars (fuel cell versus batteries). There are only about 1,000 cars running on hydrogen on the open road, and California has 9 hydrogen filling stations with 48 more under development. These early developments of the hydrogen infrastructure are very important and bode well for Plug Power, Ballard and FuelCell Energy. The rising publicity will certainly shed more light on hydrogen as an alternative to battery powered cars.
Plug Power's Q2 report is the most important near-term catalyst
I am sure that most investors are eager to see Plug Power's Q2 report, as it is expected to show a large year-over-year revenue gain. Analysts expect Q2 revenue to grow 126% to $16.95 million, a first quarter of triple-digit revenue growth since 2011. FY 2014 guidance and backlog updates will also be very important, as they will show if the growth can be sustained going forward, which is very important given Plug Power's current valuation. The company should continue to deliver triple digit revenue growth in the next several quarters, as the growth of its business ramps up. The company also expects to announce a major deal at the end of Q3, which may also be important for future growth expectations, as there might be additional upside for revenue growth expectations. The Q2 report is also very important because the company has a long history of guiding high and delivering below expectations, so the Q2 report may finally show that the management's practices have turned a corner. Based on all of this, I expect that the Q2 report will be the most important catalyst for the stock this year. Of course, if the company fails to deliver, the catalyst will be negative for the share price.
Short interest and falling volume - a recipe for a massive short squeeze
Plug Power's short interest has ballooned this year from 7 million shares at the end of 2013 to 35 million shares at the end of May. The average volume has been declining along the way, and now stands at 16 million shares. In the last three weeks, trading volume has been under 10 million shares most of the time. The "days to cover" ratio will continue to rise, which means that it will take more time for the shorts to cover their positions. This is a recipe for a massive short squeeze which might boost the share price closer to my $6.50 price target.
The lack of catalysts in the last few weeks has resulted in declining trading volume and lower volatility. This will likely remain the case in the next two months, unless the company has an important announcement in the meantime. The Q2 earnings report will likely prove to be the most important catalyst for the stock in the next couple of months, and if the results are as good as they are expected to be, the report might spark a massive short squeeze rally which might take Plug Power closer to my $6.50 price target.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in PLUG over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.