- Plug Power is promising a lot, but a handful of questions cause me concern.
- The company has strategic issues, competition from electric batteries, and recent accounting issues that put financials into question.
- When you combine this with a sharp valuation, there is far more risk than reward in Plug Power.
The future of energy is such an important topic for both social well being, and business reasons. It's one of the largest industries in existence, and new technologies are emerging to reduce our dependence on fossil fuels. An example of this is hydrogen where fuel cell and hydrogen technology company Plug Power Inc. (NASDAQ:PLUG) is pursuing an aggressive agenda to bring multiple business units online, heading the commercialization of hydrogen power.
While I respect the company's ambition and cause, I can't help but notice multiple red flags both in the company's strategy, and execution. I will outline these, and discuss why my lack of faith in management creates a poor risk/reward situation when you consider the stock's lofty valuation.
Plug Power's 2024 Vision
Plug Power has very ambitious plans in the energy space. The company is striving to lead the adoption of hydrogen as a viable energy alternative.
The company is simultaneously fleshing out multiple business units to put in place the infrastructure of a long term future in which hydrogen plays a meaningful role in energy. The company's efforts are building towards (as well as investor sentiment) this 2024 "vision", a set of milestones for the company:
Since this graphic, management has actually raised the 2024 sales target to $1.7B, an increase of more than 40%. The company's adjusted EBITDA figure works out to about 21% EBITDA margin, so the above graphic at new guidance would work out to roughly:
- Sales $1.7B as guided
- Operating Income: $283M
- Adjusted EBITDA: $354M
To give an idea of where the company's sales are now, Plug Power had gross billings of $337M in 2020 before non-cash charges put sales at negative $100M on a reported basis.
To drive this growth, which works out to about a 50% CAGR through 2024, the company is fleshing out three business segments simultaneously. These businesses include:
- Materials handling
- Hydrogen power infrastructure
- Modular arrays for stationary power
The materials handling business is powering forklifts via hydrogen fuel cells. This is currently the company's core business, and is projected to contribute $750 million in annual sales of the 2024 vision's $1.7B total when all is said and done.
The company is also investing heavily to build out infrastructure across the United States consisting of both strategic partnerships, and its own investments. This includes a "Tesla style" PEM technology gigafactory. Plug Power envisions a network of fueling stations across the United States, enabling hydrogen to be a practical energy solution for certain industries.
Lastly, the company is set to grow its modular array business. These are stationary, stackable, power arrays that can provide on-demand energy to mission critical systems. A great example of this is back-up power for a data center. Or a "micro" power grid for maritime or shore applications.
The company currently has about $5 billion in cash on its balance sheet thanks in part to a massive equity raise that added more than $2 billion to the coffers. So now that we have an overview of Plug Power's game plan for the next few years, it's time to move into my areas of concern.
Concern #1: Strategic Velocity
Ambition is admirable, but trying to do "too much" can often backfire. Plug Power is trying to forge a new path forward in a capital intensive business. This reminds me of the early days of Tesla Motors (TSLA). Tesla started small, building a premium product, offered to a target market. Then, it rolled the cash and momentum into its next product (and so forth, and so forth).
I get nervous when a company begins by trying to run in every direction at the same time. Plug Power has a core business in material handling. While that business is expected to grow, the company is trying to build out infrastructure, scale its modular business, and is eying up international markets. This can backfire when you are looking at a very capital intensive industry. Building out refueling stations and hydrogen plants is going to ensure the company continues to burn cash at a blistering pace. The company just did a massive $2 billion raise, and I have a feeling it won't be the last.
Concern #2: Indirect Competition
Plug Power is undoubtedly a leader in hydrogen fuel cell technology. However, the competition I am worried the most about isn't other hydrogen producers, but battery technology.
Do you remember when high definition media first came out and the big debate about the "future of entertainment" came down to Blu-ray Disc versus HD DVD? If you have never heard of HD DVD, that is the point. But what happened was that although both technologies functioned as intended, they were similar enough that it wasn't practical for both to exist in mainstream. Blu-Ray became the technology adopted by the industry, and HD DVD faded away.
It's not a perfect comparison when you look at electric batteries versus hydrogen fuel cells, but the industry clearly seems to be pushing in a specific direction. It's estimated that over the next 5-10 years alone, the automotive industry is investing $300 billion in electric vehicle technology.
It seems that electric vehicles are well on the way to winning the "green energy war" over the future of transportation. What about trucks and commercial vehicles? Tesla has already introduced the Tesla semi, and if history repeats itself, one could expect the other major manufacturers to follow suit. Sure hydrogen can (and likely will) get market share. But are the economics of all of this infrastructure going to make sense if demand is underwhelming?
Battery costs drop year after year, and efficiency increases. For Plug Power, the competition is getting better with age. Surely costs will come down with time and scale for Plug Power as well, but this is a game of adoption. Hydrogen needs to carve out enough demand for itself. It's too early to know if it can, which makes it a risk until proven out.
Concern #3: Financial Smoke & Mirrors
I can appreciate ambitious management, as it sets a high bar. Elon Musk has made bold claims repeatedly, and some of them haven't even come to pass. However, I don't see this as a desirable trait. The company has laid out a really aggressive expansion plan. To raise projections for 2024 by a whopping 40% is a serious statement. I typically like management teams that under promise, and then blow the doors off with actual performance. I get nervous when we start talking about huge projections 3-4 years away. A lot happens between now and then!
Then to make matters worse, just a few months after the increased projections - Plug Power gets embroiled in this accounting snafu that renders years of financial documents invalid.
I won't rehash all of the issues in the accounting debacle, but I will refer to a fellow contributor. Henrik Alex wrote a great article breaking down the nuances of the accounting issues.
While the company claims that it doesn't expect its cash position or operations to be impacted, my concern is that the company's most established business (material handling) doesn't carry as high of margins as originally thought. There may also be impairment charges. This is all a terrible look so soon after a capital raise and increased projections.
Concern #4: Valuation
When you begin to add it all together, it doesn't sound great. A company that is promising large milestones years down the road, trying to expand in multiple directions at once, and has put out unreliable financial documents. I'm not here to say that Plug Power isn't/won't be a good investment, but investors need to ignore the "green energy hype" and think about the risk versus the reward.
The company has a handful of question marks, and the last one is valuation. The stock has been volatile over the past year, with a wide 52 week range between $3 - $75 per share.
Plug Power has retreated sharply from highs, and now trades at $35 per share. Despite this sharp drop, the stock continues to price in all of the success but none of the risks.
Plug Power currently has an enterprise value of $20.6 billion. This would imply an EV/Sales multiple of 61X. This isn't a software company, this is a capital intensive business with (at least right now) a ton of question marks.
If we ignore the accounting issues and give Plug Power the assumption that they nail the 2024 projections, the stock is still trading at a whopping 58X 2024 EBITDA.
Plug Power is a cool company, and I am rooting for green energy companies to succeed. But as investors, our goal is to successfully weigh risk versus reward. Plug Power has a handful of red flags that will not let me trust the management team running the ship. I see too many potential issues, and when you combine them with such an aggressive valuation, it becomes far too difficult to make the case for investment.
This article was written by
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