Is PLUG Worth Its Price?

| About: Plug Power, (PLUG)
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PLUG continues down the path of unprofitability.

The cost of revenue continues to exceed the revenue itself.

Money raised from public offerings cannot sustain PLUG's business forever.

As everyone knows by now, Plug Power Inc. (NASDAQ:PLUG) is a leading provider of alternative energy technology focused on the design, development, commercialization and manufacture of fuel cell systems for the industrial off-road (forklift or material handling) market. Plug's stock has risen by more than 4000% over the past year from a low of $0.15 last April to over $11 in February and currently rests around $7. Most could argue that a large portion of the recent run up is due to the hopes of investors that Plug will be able to expand their technology to enter the automotive and aviation industries. The hope of this happening has been around since the company's inception over a decade ago. Even if Plug could penetrate these industries to provide clean energy solutions, the R&D cost would be massive, which they cannot afford, and they would still have the same profitability issues they have now.

Whenever I read a long bias article on Plug, the author always mentions how much of a good purchase it is at these levels or how this pull-back is a great buying opportunity. And every time I finish reading that one sentence my only reaction is, "You have got to be kidding me!" Why is Plug a buy at $7 per share but it was not back in December when it was below $1? What has changed other than the share price? PLUG has yet to become profitable as they do not have anything new to offer. The only thing the company has done is raise capital through stock offerings. Also, recently PLUG bought another company using stock alone. Something fundamentally needs to change at this company otherwise the problems presented below will persist.

Above is a chart of PLUG's revenue and the cost of that revenue on a yearly basis for the past ten years. It is clearly shown that this company has always lost more money than it makes. It should be noted that costs shown do not include general and administrative expenses or unspecified expenses reported by the company. Given that Plug has been trying to cut costs for years, it seems that it has had little to no effect on closing this cost gap.

The chart above shows PLUG's revenue from products delivered along with the cost of that revenue. Two things can be taken away from this chart. The first is that revenue from its products has increased drastically since 2009 and will continue to increase with Wal-Mart's largest announced order thus far and the anticipated announcement of another significant order with an auto dealer. The second more obvious take-away is that it costs Plug more money per product than it makes. PLUG stated in their 2012 annual report,

Cost of product revenue for the year ended December 31, 2012 increased $2.8 million, or 12.1%, to $25.4 million from $22.6 million for the year ended December 31, 2011. The increase in the cost of product revenue was primarily related to the increase in the number of units shipped in 2012 compared to 2011. During the year ended December 31, 2012, in the cost of product and service revenue category, we shipped 1,136 fuel cell systems to end customers as compared to 984 fuel cell systems shipped during the year ended December, 2011.

In their 2013 annual report Plug states,

Cost of product revenue for the year ended December 31, 2013 decreased $5.0 million, or 19.5%, to $20.4 million from $25.4 million for the year ended December 31, 2012. The decrease in the cost of product revenue was primarily related to a decline in the number of units shipped in 2013 compared to 2012. During the year ended December 31, 2013, in the cost of product revenue category, we shipped 918 fuel cell systems to end customers as compared to 1,136 fuel cell systems shipped during the year ended December, 2012.

It is not unusual for product costs to increase with increased products sold due to direct overhead costs, but it is troubling considering their costs outpace their profits. Some would argue that these costs can be reduced due to the recent purchase of ReliOn. Benefits from this purchase won't be seen until at least 2015 due to a supply agreement with Ballard Power Systems (NASDAQ:BLDP).

We are party to a supply agreement with Ballard Power Systems, or Ballard, which continues through December 31, 2014. Under this agreement, Ballard serves as the exclusive supplier of fuel cell stacks for Plug Power's GenDrive product line for North America and select European countries.

One would hope that the fuel cell stacks ReliOn produces are somewhat similar to the ones Ballard produces for Plug to avoid costs related to integrating new technology in their products. I believe Plug won't have any issue integrating ReliOn's fuel cell stacks because if there were issues, they probably would not have been purchased. This will be beneficial for Plug because it allows them to cut costs, but another issue remains.

Above is a chart of PLUG's revenue from services provided along with the costs of that revenue. This data is far more troubling than the data from product revenue above. Plug has been steadily generating more revenue from their services, but they lose more than $2 for every $1 made from this stream. The company states in their 2013 annual report,

Cost of service revenue for the year ended December 31, 2013 increased $2.6 million, or 21.3%, to $14.9 million from $12.3 million for the year ended December 31, 2012. The increase in the cost of service revenue was primarily related to a higher number of GenCare service contracts in 2013 (including service personnel to maintain these contracts) which was offset by additional expenses for unanticipated warranty claims arising from GenDrive component quality issues that were recorded during the year ended December 31, 2012.

This is where I see the most issues arising. Revenue generated from Plug's services is relatively small compared to the actual products sold, but the cost of these services is rapidly increasing. What troubles me is that these costs are attributed to a greater number of products sold. So I am concerned about Plug's future profitability with even more product in the field. Huge orders sound great right now but all that equipment will need maintenance and unless something changes, this cost will continue to weigh heavily on future earnings.

As continually stated, Plug does not make any money. They continue to experience negative cash flows from operations and net losses. I cannot stress this point enough for those considering investing in this company. The Company incurred net losses attributable to common shareholders of $62.8 million, $31.9 million and $27.5 million for fiscal years 2013, 2012 and 2011, respectively, and has an accumulated deficit of $849.4 million as of December 31, 2013. Plug states that they expect operating net cash burn to be approximately $10-$15 million for fiscal year 2014. I highly doubt this estimate to be accurate due to the same estimate being made in 2012's annual report but resulted in cash use of $26.9 million. Given the expectations for increased revenue due to expected large orders this year, there will be subsequent increased costs. Product revenue costs will most likely continue to exceed product revenue by at least $5 million and if we conservatively assume the gap between service revenue and its costs remains at $8 million, they will already be at a $13 million loss. If all other major costs remain the same at around $17 million, the company is already looking at a loss of $20 million. Given this, I would expect $20 - $25 million of cash to be used throughout 2014 unless there are more stock offerings.

To date, we have funded our operations primarily through public and private offerings of common and preferred stock, a sale-leaseback of our building, our previous line of credit and maturities and sales of our available-for-sale securities. The Company believes that its current cash, cash equivalents, cash generated from future sales, cash generated from the exercise of outstanding warrants, and cash generated from recent public offerings will provide sufficient liquidity to fund operations for at least the next twelve months. This projection is based on our current expectations regarding product sales, cost structure, cash burn rate and operating assumptions.

Year-to-date, Plug has completed two additional public offerings. The first completed on January 15, 2014 for 10,000,000 shares of common stock and accompanying warrants to purchase 4,000,000 shares of common stock. After discounts, commissions and other expenses, net proceeds were approximately $28.0 million. The second offering was completed on March 11, 2014 for 3,902,440 shares of common stock. After discounts, commissions and other expenses, net proceeds were approximately $21.5 million. In addition the company has received an additional $18.2 million from the exercise of previously issued common stock warrants. Along with the cash and equivalents of $5 million as of December 31, 2013, Plug has about $73 million available to spend. This means Plug could end up potentially using a third of their cash in 2014. This does not bode well for long-term survival unless additional capital is raised.

In conclusion, it is my opinion that Plug should be avoided at least until management can prove that this company can become profitable. Sales growth cannot sustain a company when it does not produce any net income and there are a finite number of shares (245 million) that can be offered to raise more capital. Investors should be careful investing in a company with such a long history of unprofitability. Beyond what I have presented here, anyone considering an investment in Plug should do their own due diligence first. Finally I would just like to mention that there have been many comments stating that stocks don't rise from below a buck to 11 dollars for no reason, which is true, but you should also keep in mind that stocks don't go down that low in the first place for no reason either.

Disclosure: I am short PLUG. 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.