Plug: Let's Get This Party Started (NASDAQ:PLUG)

Summary

Recently, Plug Power has sold-off alongside the Nasdaq and due to allegations of accounting irregularities.
These accounting irregularities are not nefarious and don't change the long-term prospects of the company.
Using EWT, I establish a price target for Plug of $239.

Electric car concept running on the road. — Photo by Jae Young Ju/iStock via Getty Images

Thesis Summary

Plug Power Inc. (NASDAQ:PLUG) has been on people’s radar in the last few months. This incredibly popular hydrogen play has been under scrutiny since it had to republish its financials for the last three years due to irregularities in its accounting methods. I argue in this article that this event has been overblown and since "the story" has never been better, now is a great time to buy Plug Power.

Brushing off its accounting “irregularities”

Back around March 16th, it became known that Plug Power had found accounting errors in its results for 2018, 2019 and three quarters of 2020. So, what exactly is wrong with Plug’s accounts?

There are a few issues here, but for the most part, they seem small and not nefarious. Plug will have to adjust some R&D costs under costs of revenue, which does lower their gross margin. The other issues relate to the impairment of long-lived assets and lease accounting. Namely, the company reported revenues from long-term leasing contracts, which boosted current revenues. However, the company did also record financial obligations for these. Correcting this will reduce the size of the balance sheet, but won’t affect the cash position. The reallocation of R&D into the cost of revenues affects margins, but not the bottom line. At the end of the day, a cost is a cost, and R&D is already an ambiguous term.

In these kinds of situations though, investors sell first and ask questions later. But for the most part, there is a consensus amongst Wall Street analysts that the restatements won’t affect the long-term prospects of the company. Most price targets for Plug haven’t changed, and even those analysts that did slash their price targets still see appreciation at today’s prices. Truist analyst Tristan Richardson, for example, reduced his price target by 35% to $42.

As I write this, Plug has rallied over 20% from its recent low, and I think this may be confirmation that the stock is ready to continue its previous bull run after a much-needed break.

The story has never been better

Plug is by nature a speculative story stock, and if that’s what investors are looking for, the story has never been better.

To begin with, the situation of hydrogen energy has never been better. With the recent advancements in solar technology and the move to electric vehicles, hydrogen is becoming more prevalent.

What we must understand about this market, is that hydrogen possesses some great qualities as an energy source. Much like LNG, hydrogen can be easily stored and transported and is, therefore, a great complement to renewable energies, which suffer from the fact that they are irregular. According to the IEA, hydrogen is one of the best ways of storing and distributing renewable energies, which is where the real problem with transitioning to a green economy is.

On top of that, hydrogen’s versatility means it can also be produced sustainably, and this is in fact what Plug is doing, as it prepares to build North America’s largest green hydrogen power plant in west New York.

...the plant will produce 45 metric tons of green liquid hydrogen daily servicing the Northeast region. The plant will use 120 MW of Plug’s state-of-the-art PEM electrolysers to make the hydrogen using clean NY hydropower. The New York plant joins our existing Tennessee plant in a network that aims to supply 500 tons per day of green hydrogen by 2025, 1,000 tons per day globally by 2028 and that when fully built will offer our transportation fuel customers pricing competitive to diesel.

Source: Press Release

Equally impressive is the recent partnership that Plug has initiated with SK Group. Plug and SK, which now has a 9.9% stake in the company, will work together to transition Korea to a hydrogen economy. This means building a Gigafactory by 2023 to manufacture fuel cells and electrolysers. Most significant though, is the fact that this venture has the strength of the Korean government behind it, which estimates this hydrogen economy will have a value of $40 billion by 2024. Governments backing hydrogen and renewables has become commonplace, and I wouldn’t be surprised if Plug becomes a beneficiary of the democrat’s new “big and green” $3 trillion infrastructure bill.

Fundamentals are also strong

Plug’s growth story is better than ever, but this is only half the story. The truth is, fundamentals are also as strong as they have ever been.

Source: Morningstar

If we look at financial health, the company is well-capitalized and in a great liquidity position. Both the quick and current ratios are over 2, and the debt/equity is under 1. Also, financial leverage has declined a lot since 2018.

Growth is also picking up, as we can see by the latest results. In 2018 and 2019 Plug grew revenues by over 30%. The 3-year growth average to date is 38.89% and analysts are also rather bullish. Estimates on Seeking Alpha project revenues of $460.49 million in 2021 and $721.82 million in 2022, which would represent a growth rate of 56.75%. Given the projects that Plug has announced and I have discussed above, these seem like achievable targets. To sum up, Plug is in a good financial position and consensus is bullish on its growth potential.

Play the player, not the cards

In poker, there is a saying that states that you play the person sitting opposite you, not the cards you are dealt. I feel like this can apply to investing too. All investors are trying to do the same, make money, and there are different ways of going about this. Understandably, more traditional value investors will scoff at the idea of investing in a company like Plug Power. Even for some growth investors, Plug raises some red flags, it’s not like the company is posting steady triple-digit growth.

But the fact of the matter is that Plug is a stock that “the market” loves. When the NASDAQ Composite Index (COMP) rallies, Plug rallies even harder, as we saw in the months before this correction. Conversely, it is true that when markets fall, Plug falls harder. So how do we value Plug in this market? If sentiment is what drives Plug’s price, there is a technical trading school of thought that is based on emotions and “animal spirits”. I am talking about Elliott Wave Theory.

According to Elliott Wave Theory, sentiment moves markets. Stocks move in waves cycles which, in a way, align with market sentiment and how investors behave. There is an initial phase of traders getting in early, price appreciating and thus creating more interest, sending the stock higher. Early birds then start taking profits, creating a correction, but at the right price, investors start re-entering. We have seen this play out with Plug, and it feels like as soon as markets turn up, the enthusiasm for Plug will come back in full force.

Source: Author’s work

This a long-term and quite rudimentary analysis of Plug’s chart. You will forgive me, as I don’t often use EWT, but I find that it can apply quite well to Plug. You might notice that this chart is a few weeks old, as there is some recent data missing, but since I made this chart it has played out just as “planned”.

What we have here in the bigger picture is the beginnings of a 5-wave structure, starting with the rally in 2013 as wave 1. We then have a wave 2 taking the stock back down to $0.83 in 2017, and since then we have been developing 5 waves within a larger wave 3. Plug topped in wave 3 of a larger 3 at around $80. In the recent fall, Plug tagged the 76.8% fib quite accurately, falling to around $30.5/share. If this count is correct, the next leg up in wave 5 of 3 could take us to the 123.6% extension, at around $239, maybe even higher.

Risks

Having said this, there are at least a couple of problems with the company. For starters, Plug is losing money and will continue to do so at least until 2024 according to estimates. Even after that, it’s hard to know exactly what the long-term profitability of Plug’s business will look like. which does give this investment a high degree of uncertainty.

Furthermore, the valuation on Plug continues to be high, even at these levels. Looking purely at what the business does today, which namely sells fuel cells to Amazon.com (AMZN) and Walmart (WMT), Plug is arguably overvalued. Lastly, there is a significant risk posed by other companies and, more importantly, other energy sources that might limit the appeal of hydrogen. The energy space is highly competitive, and technological changes could one day render Plug’s products obsolete.

Takeaway

Plug doesn’t make up a big part of my portfolio, but it warrants a place in it. There is a solid story behind it, good momentum and an attractive price at current levels. Trading according to cash flow and valuations is a solid way of making steady money long-term. However, investors must at least acknowledge that there are other forces moving share prices and markets other than earnings reports and “fundamentals”. I have tried to lay out here a way of understanding Plug using its growth story and EWT and I like where it seems to be heading.

This article was written by

James Foord

18.33K Followers

James Foord is an economist by trade and has been analyzing global markets for the past decade. He leads the investing group The Pragmatic Investor where the focus is on building robust and truly diversified portfolios that will continually preserve and increase wealth.

The Pragmatic Investor covers global macro, international equities, commodities, tech and cryptocurrencies and is designed to guide investors of all levels in their journey. Features include a The Pragmatic Investor Portfolio, weekly market update newsletter, actionable trades, technical analysis, and a chat room. Learn more.

Analyst’s Disclosure: I am/we are long 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.

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