Plug Power: An Inconvenient Truth

Jun.20.14 | About: Plug Power, (PLUG)


The number of shares outstanding is 11 times more than at the beginning of 2011.

PLUG has enough cash to make it through the near future, but needs to become profitable as soon as possible.

There is a word that bulls don't like to mention.

Bulls of Plug Power (NASDAQ:PLUG) rarely say the word "dilution."

The word is not mentioned with good reason as the dilution of the stock has been catastrophic. When new shares of a company are issued and the cash is not used well, the resulting dilution destroys shareholder value. Below is an explanation from Investopedia.

Suppose a company has issued 100 shares to 100 unique shareholders. Each shareholder owns 1% of the company. If the company then has a secondary offering and issues 100 new shares to 100 more unique shareholders, each shareholder will only own 0.5% of the company. The smaller ownership percentage also diminishes each investor's voting power.

Share dilution may be imminent any time a company needs additional capital. The potential upside of share dilution is that the additional capital the company receives from issuing additional shares can improve the company's profitability and the value of its stock.

Here is my own explanation of dilution as it pertains to PLUG (from my previous PLUG article):

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.

Since its inception, PLUG has lost nearly $850 million. PLUG has a decent amount of cash thanks to its most recent stock sale, so I will give the company the benefit of the doubt on that round of dilution and say that the jury is still out on whether or not it will be destructive to shareholder value. However, the previous sales most certainly were. Two graphs can truly show the dilutive effects of PLUG's many secondary offerings.

PLUG Shares Outstanding Chart

PLUG Shares Outstanding data by YCharts

The shares outstanding have increased about 11 times since the beginning of 2011.

PLUG Chart

PLUG data by YCharts

The issuance of over 100 million shares over the last three years, combined with an expansion of the "price to hope" ratio has inflated the market cap of PLUG to ridiculous heights.

It's quite instructional to look back at 2010 through 2011 and see that when the stock was around $8 per share the market cap was about $100 million. Currently priced at about $5 per share the market cap is over $700 million. In other words, the company has increased 7x in value and the stock is down over 35%. That's pretty mind-blowing.

Looking at it another way, it is very wrong to study a price chart of PLUG and think, "well, the company is only priced about where they were 3-4 years ago." The inconvenient truth is that thanks to dilution the company's market cap is up about 10x from where it was 3-4 years ago with nothing to show for it in the stock price.


PLUG has dug a huge hole for itself and it will be nearly impossible for it to get out. By selling so many shares, PLUG is perhaps diluted to the point of hopelessness. When shares were sold at very low prices, the effect was compounded even further.

For example, the two lowest-priced offerings PLUG had were on February 14, 2013 and September 11, 2013. In those two offerings combined, the company sold 40.3 million shares for a total of $14.4 million. I'm going to do a quick "what if" scenario that should illustrate just how much those offerings diluted the stock.

Let's say PLUG sold shares in early 2010 at $5 per share instead of in 2013 at under $1 per share. We'll assume it raised the same amount of money. In order to raise $14.4 million, PLUG would have had to sell 2.88 million shares at $5. In actuality, PLUG sold 40.3 million shares in 2013 for a difference of 37.42 million shares. That's a whopping 37.42 million more shares that were issued than would have been if they were issued at $5 per share.

Taking 37.42 million shares out of the current outstanding shares of 143.96 million leaves us with 106.54 million shares. So that is the number of shares PLUG would currently have outstanding in my mythical "what if" scenario of raising cash at a more opportune time. Dividing PLUG's market cap of $741.39 million by 106.54 million shares gives a share price of $6.96. That's what the stock would be trading at (assuming all else equal) if PLUG had raised cash at $5 per share instead of well below $1 per share. With a current stock price of $5.15 per share, that's 35% upside missed out on because of dilution just from the two horrible offerings in 2013.

Dilution occurs any time more shares are added. Dilution happens all the time with all sorts of companies and much of the time it is not a big deal. In PLUG's case, however, they are an amazing lesson in the damage dilution can do. The amount of dilution that the stock has seen is horrendous and extremely damaging to shareholder value. PLUG currently has a pretty good stash of cash thanks to their latest offering, so perhaps more dilution won't happen in the near future. However, if the company does not start making some profits, look out for more dilution to come.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within 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.