Plug Power: Time To Take Profits?

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About: Plug Power Inc. (PLUG)
by: Taylor Dart
Summary

Plug Power is now up over 85% in 15 trading days.

The stock is the most extended outside its bands it has been since October 2017, prior to a 30% drop in the following 8 weeks.

While the company's sales continue to accelerate on a quarterly basis, I believe the stock has gotten well ahead of itself here.

In a week that's been relatively quiet for most markets outside of the Boeing (BA) bashing, Plug Power (PLUG) is one of the top gainers and currently up over 30% for the week. This 30% rally is on the back of a 50% rally over the prior four weeks, and the stock looks to be getting ahead of itself here short-term. While revenues continue to accelerate for the company, up 12% on a sequential basis in the most recent quarter, the stock is now up over 100% for the year. It is entirely possible that this rally continues into a short-term blow-off top at higher levels, but the odds suggest the rally is likely to lose steam here at the $2.55 level. I believe the most prudent decision here is taking profits into this strength on the majority of one's position and then riding out the remainder of the trade with zero risks. In practice, this means that if I were holding the stock, I would be selling 3/4 of my position here above the $2.40 level.

(Source: TC2000.com)

Plug Power (PLUG) is a designer of fuel-cell systems, and the company continues to see strong revenue growth over the past several quarters, with 2018 being a significant year for the company. The company had total gross billings of $184.8 million for FY-2018, which was a 42% increase vs. FY-2017. Also, Plug Power has managed to quadruple quarterly revenue over the past two years (from $13.7 M in Q1 2017 to $59.8 M in Q4 2018) and this growth is accelerating over the past two quarters. Last year, the company produced its first ProGen metal plate stacks. According to the company, these metal stacks are 2.5 times denser than their prior technology and offer a 25% cost reduction at volume.

(Source: Company Presentation)

The company's GenDrive fuel cells continue to be adopted by large corporations. A few companies currently utilizing GenDrive products include Home Depot (HD), BMW (OTCPK:BMWYY), and Coca Cola (KO). Some of the benefits of Gendrive fuel cell products are increased productivity, lower operational costs, and zero emissions. Plug Power's management also discussed the potential for four major business announcements in FY 2019. While minimal color was provided on the details of these announcements, the CEO stated that they have been working with these deals for over a year.

Taking a look at Plug Power's annual earnings per share, we can see that the company is trending towards narrowed losses each year. If this trend were to continue, we would expect to be nearly earnings positive for FY 2021. The company is expecting to see its narrowest loss ever as a public company in FY 2020 of just $0.11 based on current analyst estimates. Ideally, prior to investing in a company, I would like to see their annual earnings per share positive which is why I am avoiding the name currently.

(Source: YCharts.com, Author's Chart)

It can be more difficult to assess a company without positive earnings based on their earnings trend, so in this case, it's valuable to see if we can gain any insight from sales which hopefully have a more meaningful direction in place. Moving on to sales growth, we undoubtedly see some traction on a sequential basis and year-over-year basis. The most recent quarter's earnings were up 92% year-over-year, and also 12% sequentially. This came on the back of a 47% gain sequentially in the prior quarter which makes the most recent sequential revenue increase even more impressive. Essentially, quarterly revenues are up nearly 70% since Q1 2018. Thus far the company is on track to beat its guidance for $155 - $180 M for FY 2018 with $149 M in revenues already reported through the first three quarters.

(Source: YCharts.com, Author's Chart)

The below chart I've built of revenues also gives us a look at the current trend. While FY 2017 was a slight deviation from the uptrend, FY 2018 has thus far been a sharp acceleration to new highs for Plug Power's revenues. In the past two quarters alone, the company has generated $113 million in revenue which is more than total revenue reported for all of FY 2017.

(Source: YCharts.com, Author's Chart)

Based on the company's revenues accelerating over the most recent two quarters and the potential (as discussed in the conference call) for significant announcements this year, this is undoubtedly a positive for the company fundamentally. The other positive is that there seems to be the potential for the company to finally put up a positive year of annual earnings for FY-2021 if the company can deliver on their goals. While this may seem like a way out in the future, the market is typically looking ahead 12+ months or longer, so it's closer than we think.

So why take profits in a company that is growing revenues, and has the possibility for four major announcements this year? I believe the stock is getting ahead of itself short-term and pricing in some of these positive developments already. At $1.40 or less, none of this news was priced in just a month ago, but at $2.40 and higher, I believe much of this news is baked into the stock. This does not mean the stock can't go higher long-term and is an outright sale, but the odds would suggest the stock will most likely pull back here over the next few weeks even if it does head higher later this year.

Looking at a weekly chart of the stock below, we can see that it is the furthest stretch outside its bollinger bands since Q2 of 2017. This rally led to a 30% decline in the stock over the next few weeks, and based on this, a 15-20% pullback from these levels would not be surprising. While there is no guarantee that this is what occurs, more often than not this does happen.

(Source: TC2000.com)

Moving to a trend-following perspective of the stock, we can see that the stock is above both its 50-day and 200-day moving averages after this advance, a positive sign. The stock will likely see a golden cross (50-day moving average cross up through 200-day moving average) in the next couple weeks if the stock can hold above the $2.00 level and this would be a positive for the stock also. If we can get a golden cross, I would expect that area to act as a new level of support if this rally is for real ($1.85). If it cannot, this would be a clear change of character from the persistent buying we saw over the past few weeks.

(Source: TC2000.com)

Finally, taking another look at the stock, we can see that it's running right into 2+ year resistance. The $2.50 level has been a tough area for the stock to get through over the past two years and I would expect it to at least see a retracement of 15-20% after running up to these levels in just short order.

(Source: TC2000.com)

While Plug Power remains a compelling (though speculative) opportunity long-term given the accelerating revenue growth, short-term the stock has gotten too far ahead of itself. Based on past instances of getting this overbought, it seems very likely to see a sharp pullback of 15-20% from the $2.50 level. If I were trading the stock, I would be selling 3/4 of my position above $2.40 and using a wider stop on the remainder of my position to try and ride it for a bigger move. There is clearly the potential for some positive developments coming down the pipeline later this year, but after a 100% move in just six weeks, I think most of it is being priced in.

As long as the bulls can defend the $1.85 area on a weekly close, I would consider any pullbacks to be noise and likely to be bought up. A weekly close below $1.85 would be a change of character and would suggest that this rally may have been a one-off like the previous ones over the past two years. For this reason, I would be using a defensive stop at $1.85 on the remainder of my position after selling at least 3/4 into strength above $2.40.

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.