Plug Power: Glutton For Punishment

Summary

• The bulls have really been gluttons for punishment in Plug Power as every success is met with severe disappointment in other performance metrics.
• The strength of this company is in growing its top line and expanding its global presence.
• The company has returned to seeing massive losses, but we think this is the year the company has to get to breakeven EBITDA.
• If the company cannot deliver breakeven EBITDA now, it may never be profitable, and with it, the stock will fall.

What did we ever see in Plug Power (NASDAQ:NASDAQ:PLUG)? Plug Power has just reported earnings and once again we are left with disappointment, and yet intrigue. We had such high hopes for this company, but much of the spark is gone. The bulls have really been glutton’s for punishment in this name. Plug has done a wonderful job in growing its presence and increasing sales, but it just cannot turn a profit, and we are nearly as sour on the name now as we were when the decade began and this was a penny stock. For every success, there is failure in the name. It has been a very frustrating investment for many. It is our opinion that if the company cannot deliver breakeven returns now, it may never achieve them, as top line sales are strong and cost reductions programs are in full effect. Let us discuss.

Some days the bulls win; some days the bears win

Sales are the company’s strong suit, and yet one of the largest points of contention. Plug Power continues to draw very diverse investors, some who are passionate bulls, and others who are perennial bears. The somewhat comical nature of this frustrating trade is that depending on the month, the bulls could be winning, or the bears could be winning. We can all agree, the bears are winning the argument when it comes to profitability

Well, with the most recent year in the books, score another one for the bears. We thought over the course of numerous pieces in 2016 that 2017 would be the year it all changed, the year that the company would finally turn a profit. We were so wrong. In fact, it wasn’t even close breakeven, and the losses started widening again:

Source: SEC filings, chart made by author in Excel

We reiterate - we were wrong. However, despite all new deals and an expanding business footprint, the pressure remains on the company to push toward profits.

Do profits even matter?

Investing is about earnings, and for two decades, and really in the last few years, the focus has been on what is happening with sales. Make no mistake, sales look good, but the return to big losses is in no way a positive.

The bulls argue that these losses are part of the company investing in growing its footprint. While we empathize with the notion, how many years of losses are you willing to take? This is why the stock isnt’ moving. Yes, it is up from when we first called it a buy when it emerged from penny stock territory, but it has been stuck in the $2 range for years:

Source: Yahoo finance

The question remains how long are investors going to keep this stock above $1.00 if profits elude the company? There has to be some at some point, right? Well, no there doesn’t have to be, but that would lead eventually to the stock giving up. This is the why the stock’s performance is lousy; losses are widening. Now let’s discuss what is working, sales.

Sales make the case for bulls and bears

Let us begin with shipments. They were up year-over-year. The company shipped a total of 1,357 GenDrive units, up from 1,204 a year ago. In addition, three GenFuel site were installed as opposed to five last year.

What we see as one strength is growth in the positive margin services side of the business. Factoring in the activity over the last year, there are now over 16,600 GenDrive units under service or PPA contracts, up from 11,000 a year ago. It is here that the company has a chance to push back toward breakeven. We side with the bulls who argue that this is why the company is eating losses, to get those units sold and deployed, and start making money on the back-end service agreements. It is our belief however that the company has got to be significantly more aggressive in cutting costs, as the company is burning cash.

Total revenue for the quarter was $33.7 million, up just 3.3% year-over-year. The bears may cite that this isn’t all that impressive relative to two years ago when the company was seeing continued double-digit increases in revenues. We realize that timing of contracts and deals impact what we see quarter-to-quarter, as back in Q3 revenues were over $60 million. This is why we prefer to look at annual performance. On an annual basis, we see revenues did rise 55% over last year to $133 million. However, 2018 sales from management’s view point are going to grow, but at a reduced pace.

Management has guided $155 to $180 million for 2018 sales. At the high end of these expectations, the top line will rise 35%. Look, that’s definitely positive, but below the growth we saw last year. Let us also curb our enthusiasm. Just a few weeks ago, the general consensus from analysts (and from ourselves) was that 2018 revenue growth would be on par with 2017.

We were looking for at minimum $200 million, with a range of $200 to $225 million, based on managements’ expectations and the trajectory of sales. So, when the company surprised us with a guidance revision to present levels, we grew very bearish. This is because the top line is what is keeping investors in this stock. We suppose the guidance is more realistic. Long-time investors can attest, while past performance is no guarantee of future performance, management historically overpromised and underdelivered.

Cash is king

Now, it isn’t all bad news. One key positive in the quarter was positive free cash flow. Cash is king in this business, where cash burn is exceptionally high. Net cash from operations was $21.1 million and there was $24.2 million in free cash flow generated in Q4 (this compares to negative $12.9 millon a year ago). As it stood to begin the year, Plug has $68.1 million in cash (including restricted cash). While this is positive, let us not forget is widened its loan with New York State. Also keep in mind that overall cash burn in the year has led to cash and cash equivalents (non-restricted cash) to drop to $24.2 million from $46 million a year ago. Getting to breakeven would go a long way to preserving cash.

Will it break even? We are gluttons for punishment.

Is breakeven finally on the way? We just cannot help ourselves, but we want to believe in the comapny. You know, our view of the company about being breakeven by this point turned out incorrect, though this was in large part due to strategic moves made by the company to expand its foot print internationally. However, management has made a 2018 priority of breakeven EBITDA by the end of the year, and the data trends suggest this is possible:

Source: Business update 2018

The outcome remains to be seen, but we think the only way we see breakeven really happening is through significant cost reduction. For the current quarter we are looking for double-digit negative gross margin, as well as negative EBITDAs, based on bookings, historical margins, and management’s guidance.

Despite a sluggish start to 2018, the second half of the year should see improvement. This is because Plug is trying to rein in costs, will have more service contract revenue (where it actually sees positive margins), and will improve product margins (where it currently gets hammered). But it comes down to delivery, and this is a critical year.

Our final thoughts

So, are we bullish or bearish here? The answer is both. On the one hand, we have been disappointed time and again with this management team and the company. On the other, we are not blind to the immense improvements in sales. We think the data supports both the bull and bear case. Overall, if the company delivers, the stock will move much higher and we think the bulls should position accordingly.

For the bears, it is our belief that if the company cannot get to breakeven now, with all of the work that has been put in to expand globally, acquire contracts and to improve EBITDA, it may never be profitable. However, breakeven EBITDA is the first step in getting to a potential breakeven bottom line.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PLUG over 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.