Plug Power Is A Speculative Stock At Best

| About: Plug Power, (PLUG)

Summary

Plug Power continues to bleed cash and the growth in revenue is not translating into cash.

Extremely low barriers to entry means the competition will increase.

Shareholders have experienced a lot of dilution over the last five years.

Major players will be easily able to shift from Lead-Acid batteries to fuel cells and pose a huge threat to Plug Power.

Plug Power (NASDAQ:PLUG) is one of those investments for which you rely more on hope than the fundamental progress of the company. The stock has been a poor performer and the company has not been able to capture the core segment of its target market despite being one of the early movers - it has been seventeen years and the business is still losing money.

Although the revenue growth has been strong over the last two years; it has not translated into positive profit margins or operating cash flows - the business continues to bleed cash. The sales model of the company (sell and lease back) does not allow it to use its cash efficiently, although it does prove to be a key factor in growing the sales of the company. In a sale/leaseback agreement, the purchaser leases the asset back to the seller for regular payments. The seller benefits in the shape of regular payments and continues to use the asset while the seller gets a higher number of sales. However, in case of Plug Power, the company is bound to have restricted cash for these sale/leaseback agreements. Plug Power classifies these agreements as operating lease and on 31 December, 2015, the company had a total operating lease obligations worth over $60 million. The image below shows the contractual obligations of the company.

Click to enlarge

Source: 10-K

In the most recent conference call, the management emphasized that they were looking at alternatives to the sale/leaseback agreements so that the cash could be used efficiently. However, there was no clear indication as to what the management is trying and what sort of revenue recognition methods they will be using in the future. The analysis of other financial metrics shows that it is almost an impossible task to recommend Plug Power as a buy on the basis of its fundamentals.

2015

2014

2013

2012

2011

Revenue

$103

$64

$27

$26

$28

Gross Profit

($10)

($5)

($11)

($14)

($9)

GP Margin

-10%

-8%

-41%

-54%

-32%

Operating income

-$59

-$38

-$29

-$37

-$31

OP Margin

-57%

-59%

-107%

-142%

-111%

Net Income

($56)

($88)

($63)

($32)

($27)

Net Margin

-54%

-138%

-233%

-123%

-96%

EPS

($0.32)

($0.56)

($0.82)

($0.93)

($1.46)

Number of Shares

176m

159m

76m

34m

19m

Dilution

9.66%

52.20%

55.26%

44.12%

0.00%

Click to enlarge

Source: SEC Filings

Revenue growth has been impressive and it is probably the only thing that is encouraging its investors. However, this growth has not been converted into profitability. The gross margin is still negative and while there has been some improvement in operating margin, the overall figures are depressing. The trend is consistent for the net margin - even the tax benefit from the sale/leaseback agreements has not had any significant impact on the net margin. Finally, the consistent dilution - total number of shares outstanding has increased by more than 9 times in the past five years. That means those shareholders who held Plug Power shares in 2011, have faced a total dilution of 89% -- their ownership in the company has diminished by 89% based only on the new issued shares. Plug Power was trading at around $8 at the start of 2011; if someone bought the stock at that price, he/she will be looking at an even larger loss with the dilution and the stock price deterioration. From 2011 to 2015, each year the shareholders have faced some dilution as the company has been issuing new shares to raise cash. As long as the business continues to have negative operating cash flows, it is likely that the dilution events will continue because the company has to meet its cash needs.

Plug Power wants to expand into other areas, which is a positive sign. However, one must ask this question that how much success we can expect from the company when it has not been able to completely dominate its core business area. There is still a lot of room for growth in the material handling business alone. On the other hand, the lead-acid battery market is huge - Enersys (NYSE:ENS), only one player in this industry is bringing in around $2.5 billion in annual sales. The company also wants to expand into Europe, where the demand for clean energy is growing, but it is still unclear how the company will capture this market.

One of the most important risks is the threat from its competitors. There are no large barriers to entry in this industry. Hydrogen fuel cells are not a new phenomena and the technology is widely available. I do not think we will see another Kodak like event and these lead-acid battery manufacturers will certainly adopt the fuel cells technology if the tide finally turns in favor of the fuel cells technology. There are many options for the major players to expand into this area - some small players will certainly become a target for major players. One example is the acquisition of Nuvera by Hyster-Yale (NYSE:HY) in 2014. These larger players with their superior financial clout could prove to be a major threat for Plug Power.

It is an extremely difficult task to persuade a business to give up a low cost option (Lead-Acid batteries) and opt for a newer, higher-cost alternative. However, even if the businesses start to pick up fuel cell powered equipment, the companies like Hyster-Yale will be able to offer better terms and competitive pricing due to the size of their businesses.

I fail to see a competitive advantage for Plug Power that will set it apart from the rest of the competition. The company is just an assembler - it procures fuel cells and hydrogen and just assembles it before selling to customers - any other business will be able to do it. In fact, this is a key problem for the company when it comes to the cost of production, in my opinion. Vertical integration would have resulted in saving a lot of cost for Plug Power. Usually, when the sales volumes increase, a business starts to achieve economies of scale and the cost of production falls - the leverage from fixed assets also starts to be in favor of the business. However, we are not seeing a decline in production costs for Plug Power.

Based on the analysis of fundamentals and the risk from its competition, I do not think Plug Power is a suitable long-term investment. It might be a good speculative stock for any short-term gains. The investors can hold it as a speculative bet in the hope of a quick gain - however, the long-term prospects don't look too good. The key word here is "hope".

Disclosure: I/we 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.