Plug Power Will Continue To Grow

Aug.21.14 | About: Plug Power, (PLUG)


The first ever profit announcement by the company played a major role in pushing the stock price up.

Solid growth in gross margins shows that the increase in sales is accompanied by a decrease in overall costs.

Expansion into the market for electric lift trucks at automotive manufacturing sites will allow the company to continue growth in its revenues.

One of the major challenges for fuel cell manufacturers is the per unit cost of fuel cell systems which is still a hindrance for the sector.

Plug Power (NASDAQ:PLUG) is one of the most interesting stocks in the market at the moment - the technology has fascinated a number of investors and the trading volume has been impressive. However, as a result of heavy trading, the stock has been extremely volatile - volatility brings considerable gains for savvy traders; however, at the same time, high-volatility spooks long-term and cautious investors. The most recent catalyst for the company has been the first ever net profit announcement by Plug Power - the company reported $0.02 per share GAAP earnings for the second quarter of the year. The news was enough to send the investors and traders into a frenzy of buying as it showed the technology was getting traction. The image below shows the price movement over the last thirty days.

Before I move on to the technology and its acceptability, let's first take a look at the key points in the earnings announcement.

Plug Power reported net income of $3.8 million, 2 cents for the second quarter of the year - it is important to remember here that the net income was reported on GAAP basis, meaning, the net income includes non-cash gain which Plug Power realized on previously issued common stock warrants. If we exclude the non-cash gain then the net loss for the second quarter was about $5.8 million, or 4 cents per share. So, the core business of the company is still operating under losses - however, this does not mean Plug Power has not progressed. The net loss per share for the same quarter last year was 14 cents, compared to adjusted net loss of 4 cents.

At the same time, gross margin during the second quarter of the last year was negative, which has now gone up to 17%. This shows that there is not only growth in demand but the margins are also rising. The most important figure in the earnings release was the GenDrive units shipped - Plug Power shipped 687 GenDrive units during the second quarter, close to three times the units [246] shipped in the same quarter last year. Healthy growth in the sales of GenDrive units shows that robust market for fuel cell units is developing, which is a massive plus for all the fuel cell manufacturers.

Moving on to the technology and the future growth prospects of fuel cell manufacturers - the growth potential is immense in the fuel cell sector. The first question is that why would vendors adopt fuel cell technology? The answer is simple: pollution and cost savings. A number of businesses are facing lawsuits as well as public pressure regarding carbon emission - there is pressure on the businesses to help reduce the carbon footprint in order to preserve the environment. Hydrogen fuel cells do not affect the environment as there is no carbon emission - as a result, vendors prefer this source of energy. Especially, the use in the warehouses where the workers operate equipment in a closed environment, the advantage of Hydrogen fuel cells increases further. At the same time, the use of fuel cells results in considerable cost savings as well as an improvement in operations - lower loss of productivity [3minutes] for fuel cell refills compared to traditional batteries [20 minutes] results in better operational efficiency for businesses. You read the detailed analysis of benefit to retailers here.

The company is now focusing on the electric lift trucks at automotive manufacturing sites - contracts are already in place with BMW, Volkswagen (OTCPK:VLKAF), Mercedes-Benz and Honda (NYSE:HMC). The auto manufacturing process is mostly automated and the electric vehicles in this process use traditional batteries. So, there is potential to replace these traditional batteries with more efficient and cleaner fuel cells technology. The auto manufacturing process is similar to warehouses in environment as the workers operate in the closed environment.

The biggest challenge for fuel cells sector will be the per unit cost - despite substantial cost savings in the long-run and better NPV; the vendors are showing concerns about the per unit costs of the fuel cells systems - vendors are worried about the upfront costs. The companies will need to work more on the technology and bring down the costs further in order to develop a robust market. Furthermore, the prospect of hydrogen fueled cars raises another question: what will come before? Cars or the fuel infrastructure? As we have highlighted the expected growth in the automotive segment in our previous article, hydrogen powered cars are a reality and the demand for fuel cells as well as hydrogen as fuel will surely rise over the next few years - this shift in the energy sector will develop a market for fuel cells which will allow companies like Plug Power to further enhance their presence in the market.

Bottom Line

Plug Power remains one of the most attractive picks in this sector due to the company's solid position in the retail market and its focus on specific segments of the industry. The company is growing its user base very carefully and slowly expanding its target market. The overall potential of the fuel cell sector is massive as the businesses are looking at alternative energy. We will continue to see volatility in the stock price of Plug Power in the short-term as the product still lacks a robust market. However, I believe the long-term prospects are good and the stock should do well over the next few months.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

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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.