Plug Power stock analysis: Has the hydrogen hype fueled the stock price too far?
Plug Power symbolizes hope for the hydrogen market, the largest share in the renewable energies index that’s also the most traded stock amongst brokers for several months.
Amazon is a Plug power customer – but essentially more. In this analysis, I’ll tell you about the background behind the Amazon deal and what it reveals about the plug Power share.
I believe there are three reasons why investors are excited about Plug Power right now:
- Hydrogen in the huge regenerative energy-generating market of the future
- Plug Power focuses on the technology rather than the end product (“Don’t sell gold in the gold rush, but shovels”)
- A political boost that could benefit hydrogen companies
On the one hand, there are these expectations and favorable conditions. On the other hand, there is an exorbitantly high value, balance sheet issues, and quarterly numbers that show short-term setbacks.
So there are plenty of reasons to take a closer look at a stock to see if it’s a good investment right now or one that could pay off in the future.
You’ll learn how the business model works, what Plug Power’s earnings look like, what investors expect, and whether the stock is currently valued attractively.
Table of Contents
Table of Contents
Basics of plug power stock analysis
Plug Power Inc. is an US-based company engaged in the development of hydrogen fuel cell systems. CEO is Andy Marsh who joined Plug Power in April 2008.Since Plug Power was founded in 1997, the company has yet to close a year with a profit, even after going public in 1999. Their success is reliant on the use of hydrogen as a sustainable way to generate energy.
Plug Power said:
“The architect of modern hydrogen and fuel cell technology, Plug Power is the innovator that has taken hydrogen and fuel cell technology from concept to commercialization.”
Plug Power develops fuel cells that get used in cars and trucks, emergency power systems, industrial trucks, and other services that relate to hydrogen, such as hydrogen storage and dispensing systems.
Size and valuation
With a market capitalisation of $15 billion Plug Power is worth about three times Ballard Power Systems, the second ranked hydrogen pure player and Canada-based rival of Plug Power. However, compared to the electric vehicles manufacturer Tesla with a market capitilization of $769 billion (50x), Plug Power is still relatively small.
Why is Plug Power a Pure Climate Stock?
The fuel cells that Plug Power produces are vital for decarbonizing the transportation, industrial and the energy sector. In a fuel cell hydrogen is combusted like any other fuel in cars, ships and airplanes. Other applications of hydrogen are in energy intensive industry such as steelmaking as well and energy storage. As hydrogen does not contain carbon, it will not produce CO2 emissions.
However, hydrogen is not a zero-carbon fuel, as it needs to be produced first. When hydrogen is derived from coal or natural gas it has a significant carbon footprint (“grey” hydrogen). Most of the grey hydrogen produced today is made by a process called steam methane reforming, which generates between 9-12 kilograms of CO2 emissions for each kilogram of hydrogen produced. Grey hydrogen can turn “blue” when most of the carbon emissions associated with its production are captured and, for instance, stored permanently underground.
What the world really needs to get to net zero by 2050 is “green” hydrogen. This form of hydrogen can be produced with zero carbon emissions using renewable electricity to split water into oxygen and hydrogen.
In a statement released in August 2012, the Plug Power CEO emphasized that his company is “fully committed to a green hydrogen future”. Plug Power is investing in a 500 ton production capacity per day for green hydrogen by 2025. The company believes “our green hydrogen production will outperform blue hydrogen in cost, availability, and environmental attributes”.
As Plug Power business model is 100% about products and services for the hydrogen economy, Plug Power is a Pure Climate Stock.
Share price development
Plug Power’s share price has developed enormously over the past few years. Between May 2020 and February 2021, we saw an increase of +1,300%, and the stock has corrected by almost 50%. Today, the share is 650% higher than what it was one year ago.
Unless otherwise stated, all figures are in the respective home currency and TTM (= last 12 months) unless otherwise stated. Addition ‘e’ = expected.
- Country: USA
- Industry: Hydrogen & Fuel Cell
- Market Cap: $ 15 billion
- Revenue: -$ 0.005 billion (see below)
- Revenue (2021e): $ 0.49 billion
- Net income: $ -0.7 billion (see below)
- Net income (2021e): $ -0.24 billion
- Free cash flow (Q2 2021): $ -1.6 billion
- P/S ratio: –
- P/S ratio (2021e): 31
- P/E ratio: –
- P/E ratio (e): –
- P/CF ratio: –
- PEG ratio: –
Quality & Growth
- D/E ratio: 10%
- Gross margin: -32%
- Revenue growth (last 3 years, TTM): 40% p.a.
Plug Power is based in the hydrogen and fuel cell market and is growing at an average of 40% per year. So far, it has been consistently deficit. Recently there were rather sobering quarterly results and balance sheet problems. However, the hydrogen market still offers the prospect of a large potential market.
5 Facts about Plug Power
- Renault and Plug Power are collaborating to develop hydrogen-powered vans that will be available this year.
- Plug Power invested $1 million in Universal Hydrogen, allowing Plug Power to distribute hydrogen to airplanes worldwide.
- Plug Power is working on the first wind-supplied hydrogen power plant in the US.
- Plug Power aims to only supply green hydrogen by 2025.
- Sales have grown 500% over the last five years, but Plug Power seems several years away from profitability.
To rationalize how the company creates and delivers value, we need to evaluate the business model.
How strong is the sales growth?
Plug Power’s gross sales have been increasing since 2016 after having stagnated for a long time.
- 2016: $ 83 million
- 2017: $ 100 million (+ 20%)
- 2018: $ 175 million (+ 75%)
- 2019: $ 230 million (+ 31%)
- 2020: $ -100 million (- 143%)
- 2021(e): $ 494 million (+ 594%)
Plug Power has grown a little more than 500% over the last 5 years (Q2 2016 to Q2 2021). This positive trend is likely to continue. Revenue determined according to GAAP guidelines is clearly positive in Q2 2021 with 125 million US dollars, and for the year 2021, analysts estimate total revenue at 494 million US dollars.
Negative sales through Amazon deal in 2020
Plug Power reported negative sales for 2020. The reason for the negative sales was “Non-cash customer guarantees” in Q4 2020.
What’s behind it: Amazon is a Plug Power customer who acquired options in 2017 to purchase up to 55 million Plug Power shares for 1.20 USD, with Plug Power Amazon giving a discount of some sort. Amazon has to spend a total of USD 600 million on Plug Power products over time to achieve this.
The value of Amazon’s stock options has risen significantly in comparison to the agreed-upon payout. As a result, the turnover needed to be adjusted.
This can be overlooked in operational sales, but this strategy is still intriguing. This is discussed further in the SWOT analysis.
Balance sheet problems
In March 2021, Plug Power was forced to adjust several balance sheets retrospectively, causing the stock to decline by up to 20% in 2020 momentarily.
Accounting errors at Plug Power had been discovered. KPMG found inaccuracies, necessitating the correction of three annual financial statements in a row. The stock had since dropped by 35%. But nothing should change in the future, according to Plug Power.
What is the business model and strategy?
How does the company make money?
Plug Power lists four different segments that are the main revenue contributors:
- 70% – Fuel cells and related infrastructure
- 9% – Fuel cell services
- 9% – Power Purchase Agreements
- 11% – Hydrogen supplied to the customer
The gross margin is currently -32%. In other words: Products and services are sold at a below-cost price. Plug Power is therefore bleeding money and is still not making any income.
Plug Power rises and falls with fuel cell, hydrogen technology and relies on newly driven efforts to mitigate climate change.
A brief explanation of terms: hydrogen & fuel cells
A fuel cell is an electrochemical cell that creates energy by converting one form of energy (mostly hydrogen) to another. The process involves using the chemical energy of a fuel and an oxidizing agent to create electricity.
Plug Power uses hydrogen as a fuel to create energy through the fuel cell. To develop hydrogen itself, H2O (water) must get split into hydrogen and oxygen. When this separation occurs using renewable electricity, it is known as green hydrogen.
Plug Power describes itself as a “unique company” because they combine green hydrogen and fuel cell technology.
Where is this process mainly used now?
Areas of application
The energy gets used in cars, trucks, forklifts, heating apartments, and off-grid devices, such as camping or measuring instruments.
Hydrogen energy can also get used for large industries such as supplying a building with electricity and in the industrial sector through transportation like trucks and forklifts.
Advantages and disadvantages of hydrogen
Hydrogen and batteries are two different storage options for energy. Volkswagen describes why it relies primarily on electromobility:
“One of the reasons why Volkswagen is so consistently focusing on electromobility is because this drive technology is the best way to reduce CO2 quickly and efficiently. According to experts, hydrogen-powered fuel cells are comparatively inefficient – both in terms of efficiency and cost.“
The German hydrogen expert Prof. Volker Quaschning underlines that statement. He says that: “The normal car for average purposes will very probably be a battery-powered car in the future.“
Why Prof. Volker Quaschning says so, is because the overall efficiency of the process of producing, transporting and utilizing the energy in the car is much lower for hydrogen. As the figure above shows the efficieny rate of hydrogen is only 30% compared to 76% for emobility.
However, there is an important role for hydrogen in energy storage. In the following graphic, Plug Power shows that storage costs for hydrogen become relatively cheaper the longer it gets stored. For storage longer than 8 hours hydrogen is from an economic perspective more favourable than batteries.
In addition, the most important advantages and disadvantages of hydrogen (especially in mobility and partly in general) are presented here:
Deep Dive: Mechanisms of the Business Model
Let’s delve into the future of Plug Power. Hydrogen technology is an enormous market, and we don’t know where and how much will get used in the future. Exciting questions for Plug Power are: What are the company goals, does it have a moat, and will it become a highly competitive market?
Plug Powers goals
By 2024, Plug Power plans to raise revenues from USD 330 million to USD 1.2 billion while also achieving EBITDA and EBIT profitability.
According to Plug Power, they are on track to achieving this goal. The EBIT and EBITDA margins are then 17% + and 20% +.
If we analyze the planned margin development for Plug Power, we want to see an increase in the gross margin and reduce overall costs to become more profitable.
A gross margin of 30% or more should then get achieved by 2024. Central levers: higher volume, technical progress, and reduced costs.
Lastly, strengths that Plug Power have listed:
- Best technology and experience with PEM electrolysis
- A clear way to scale and 75% cost reduction from today’s perspective
- The market is greater than $ 200 billion
- Large investments in electrolysis
Very successful companies often have a strong moat. Companies such as Apple and Amazon have integrated a network of products to grow to enormous heights. Their strategy is to innovate continuously, such as implementing new products like marketplaces, streaming services, and products. For example, Amazon has Amazon Prime, and Apple followed with Apple TV. Other companies such as Facebook and Etsy have done the same to scale their business. The more users, the more valuable the product.
While these moats most often get seen in the digital world, these companies can grow for a long time and realize enormously high-profit margins without being heavily affected by the competition.
We can see a few examples in the traditional industrial economy. Automobile manufacturers such as Volkswagen, Daimler, Toyota, Siemens, Thyssen, Krupp, and many others usually have:
- A capital intensive business
- Low-profit margins
- Cost advantages due to size, for example, economies of scale
Plug Power is rated similar to a digital company with high margins and moats, becoming more common in industrial companies. But, is there a special technology that Plug Power has that no one else has on the market? While we aren’t hydrogen experts, there is no evidence in the 117 slides of the investor presentation and quarterly reports that suggest they have something groundbreaking.
Are there other economies of scale? Plug Power is the market leader.
With sales of USD 300 million of sales in 2020, it is still a long way from economies of scale, which is also illustrated by the figures (e.g., the gross margin) even though Plug Power would like to invest heavily in it and achieve this in the future.
This is the most likely moat: invest a lot, build large factories, and achieve cost advantages in the long-term.
Plug Power would like to increase sales by a factor of 3 to 4 by 2024 and grow faster than in previous years. The gross margin should increase to 30%, the EBITDA margin to 20%, and the EBIT margin to 17% or more. In our opinion, there is no strong moat for the long term. Cost advantages through economies of scale seem the most realistic.
Market size and competitors
The hydrogen industry is a future field, and it may perhaps be one of our time’s big megatrends. By 2050, according to Bank of America experts, the technology will be able to meet a quarter of the world’s energy needs.
In several sectors of our economy, hydrogen is already in use. Particular in the chemical industry. Future applications for hydrogen include:
- Road transport: Although governments currently ramp up infrastructure for battery-based emobility solutions, it is possible that for trucks and other large verhicles green hydrogen will play an important role as a fuel source. More than 20,000 hydrogen forklift trucks are already in use globally.
- Maritime and air transport: Low-carbon fuel options are restricted in shipping and aviation, which presents an opportunity for green hydrogen.
- Buildings: Green hydrogen could be mixed with existing natural gas networks in buildings, with the greatest potential in multifamily and commercial buildings. At the same time, longer-term possibilities may provide direct hydrogen use in hydrogen boilers or fuel cells.
- Energy-intensive industries: For example in steel plants carbon and coke can be replaced with green hydrogen.
- Power generation storage: Hydrogen is a suitable option to store renewable energy for longer durations.
According to the Global Hydrogen Fuel Cells Sales Market Report 2020, the hydrogen fuel cell market was valued at $2,476 million in 2020 and is expected to reach $13,760 million by 2026, growing at a CAGR of 33% throughout that time.
Whom is Plug Power competing with in this market?
- Ballard Power, which is also listed, is a Canadian company that got founded in 1979. They are now worth around USD 4 billion and have sales of around USD 100 million.
- Other, less-known competitors include Pajarito Powder, Ceres, ZeroAvia, EnergyNova, Bloom Energy, and FuelCell Energy.
Let’s take a closer look at Plug Power stacked up against Ballard Power:
Also Ballard is not profitable yet, but is also not able to grow sales. Here Plug Power is doing better, but with a strong cash runaway and a higher leverage. The difference in market capitalization and revenue between Plug Power and Ballad is factor 4-5 and the gross margins are in the same ballpark. An interesting fact is that the sum of the market capitalization of both companies exceeds the estimated fuel cell market value projected for 2026; and there a number of more pure hydrogen players in this market.
Other industrial companies around the world that have had a difficult time lately could also see new prospects in hydrogen. Thyssen Krupp in Germany is considering using green hydrogen on a large scale and already has an existing customer based for industrial clients. This is to say that the early movers like Plug Power are not necessarily those that will be the most successful ones in the long-term.
Drivers and outlook for fuel cell market
Around the world, more and more countries are decarbonizing their economy., with the topic of hydrogen becoming increasingly prominent. The World Energy Council (WEC) reports that at least 20 countries, accounting for about half of global economic production, have already adopted or are about to adopt a national hydrogen policy. Japan, France, South Korea, the Netherlands, Australia, Norway, Spain, and Portugal are top performers.
According to the European Union (EU), Green hydrogen is “a key priority to achieve the European Green Deal and Europe’s clean energy transition.” The EU Hydrogen Strategy aims to decarbonize hydrogen production and extend its use in industries where fossil fuels can be replaced. The EU Hydrogen Strategy is expected to have a long-term impact on several industries, notably the energy and transportation sectors.
In the United States, the US Department of Energy has started providing funding towards the new Hydrogen Energy Earthshot initiative. The 31 projects will assist the Biden administration in achieving its objective of lowering the cost of clean hydrogen to $1 per kilogram in the next decade by advancing clean hydrogen technologies such as renewables, nuclear power, and thermal conversion.
These policies are needed and involve vast amount of public financial support, because the application of hydrogen technology is at its infancy in many sectors. And the costs of fuel cells and the production of green hydrogen cells is still significantly higher than those of fossil fuels.
This means that the rate of growth of the green hydrogen market will depend quite simply on how quickly governments require the economy to decarbonize and incentivise green hydrogen application financially. Without such support there will be no fast market development for green hydrogen in the foreseeable future. All companies that operate in this space, including Plug Power, bank on an accelerated and increased public support for the green hydrogen market.
Let’s now evaluate the business model and look at the strengths, weaknesses, opportunities, and threats.
What are the company’s current characteristics?
First great partner
Amazon and Walmart have already signed on as Plug Power partners. Although the circumstances are unusual, at least at Amazon, Plug Power assists in the stock market, and the actual economy gains more customers.
While we don’t know how superior hydrogen is in the current market, there is no question that it is a solution for generating and storing energy in a climate-friendly market. Some markets, such as the entire transportation sector, mobility, energy storage, and others, are open to this technology.
$ 3 billion in cash
Plug Power currently has around USD 3 billion in cash on its balance sheet. A company as large as Plug Power requires considerable capital, but it gets presently served in a relaxed manner.
Where there is light, there is usually also shadow. Let’s look at the company’s weaknesses.
Problems in balance sheets
Companies with problems in their balance sheet are always tricky. There could just be inconsistencies in the growth phase, and sometimes a conscious attempt to actively improve the share price. This usually gets done to increase bonuses or to simplify the raising capital. As the saying goes, “fake it till you make it.”
Plug Power’s gross margin has been negative in recent years and is currently in the single-digit percentage range. The gross margin must get expanded to 30% by 2024, which is highly optimistic compared to its current perspective.
The 30% works for companies in the industrial industry, although it is very little compared to companies valued as expensive as Plug Power. Many of them are software companies that already have real gross margins of 75% and more.
Amazon: owner or customer?
Plug Power won Amazon 2017 through the product quality and through the offer to buy up to 55 million shares for 1.20 USD. For this, Amazon has to pay USD 600 million for products from Plug Power.
Those warrants vested last year, and Amazon gained ownership of 55 million shares at approximately $6 exercise price. Amazon appears to have sold the shares, as it hasn’t declared buying an equity investment in Plug Power, as it would be required to do under-reporting regulations.
Plug Power is rapidly expanding and providing a valuable service to retailers like Amazon and Walmart, although trading at an excessive price-to-sales ratio of 31 (2021e) with no evident profitability.
Despite its own climate commitments and increased interest in Plug Power’s products, Amazon did not appear interested in holding the shares. This, together with the company’s history, valuation, and lack of earnings, seems to be a red flag to investors.
More concepts than facts
Plug Power calls their investor presentation “Plug Symposium.” It is similar to Tesla’s many years ago, or as we saw in Nikola recently. Their focus was more on concepts and vision than facts. The concepts and ideas are to be implemented by 2024, although little exists thus far.
Out of 117 slides – counting generously – only five relate to the development over the last years. Looking through each slide, you will hardly learn anything about how the company has recently developed but only get a vision for the future.
Critically asked: is a vision worth $ 15 billion? While Tesla has done well, there have been many other companies where this focus on concepts and visions has been a negative indicator.
In July 2021, Nikola stock crashed following a meteoric rise. According to founder Trevor Milton, a whale manipulated the market by moving $75 million worth of shares in a single trade.
While this devastated Nikola’s share price, it continued to drop due to the following reasons:
- Unrealistic predictions: Milton was ambiguous about the reservation figures of their latest products
- Exiting shareholders will put pressure on its stock prices.
- Price obsessed management: Many believe Milton began to sound like a stockbroker instead of a visionary in the auto industry.
Nikola plays the blame game on critics instead of focusing on innovation and doing what’s best for the consumer and shareholders. But the reality is that at present the stock is still 60% down from its all time high.
It is one thing to have a vision, but another to have a solid, data-driven strategy to achieve those goals. We can clearly see that Plug Power is focused on the future. On the other hand, they have been around for more than 20 years. This is a strong indicator for investors to invest in ideas for the future, not factual financial and market projections.
What are the opportunities for the company to grow and increase value?
Grow into a large market (and enlarge it)
Plug Power is growing and will continue to grow. The more innovative Plug Power becomes and increases its performance, the larger the market is open to this technology.
Political tailwind from climate change
As the world increases regulations to curb climate change and significantly reduce climate-damaging emissions, companies are forced to lower their carbon footprint.
They say “political stock exchanges have short legs,” which is usually true, but this is going to be a long trend as governments and pressure from the public focus on preserving the climate.
Every company has risks such as a flagging economy, wrong operational decisions, political interventions, etc. What could specifically endanger the business model shown here or inhibit growth?
Plans get delayed
Plug Power wants to build, develop, conceptualize and implement storage solutions, fuel cells, factories, and more. Unfortunately, history has proven that these processes can lead to delays.
Hydrogen is accepted more slowly than expected
Plug Power can only grow as fast as they predict if the market adopts hydrogen solutions at the same pace. Therefore, investment cycles in industrial companies, legal requirements, and economic feasibility play an essential role.
Competition of technologies
Competition can become a threat if they offer alternatives if they gain traction at a good pace, for example, another company developing another electric battery for the truck industry. If they offer a charging network for electric batteries with a higher charging capacity and faster charging times, the more attractive the electric battery becomes. This would make hydrogen use in the truck sector less attractive.
Money can be made without a strong moat in a market with low entry barriers but not with high margins. When high margins emerge, enough competitors are attracted to pressure them once more.
We have now obtained a comprehensive picture of the company. Finally, let’s take a look at the share, bring quality and valuation together and draw a conclusion.
The fair value of the share
To determine the fair value, I made the following assumptions over a time horizon of 10 years:
1. Sales growth
Plug Power recently achieved annual sales growth of around 40%. 21 analysts expect on average 50% growth over the next 3 years. I assume that the short-term sales growth is 40% and then gradually flatens. The long-term growth perspective is challenging to assess. Plug Power could largely disappear from the market or be a leader. I assume that sales growth will level off at 12% p.a. in the long term (> 5 years). This results in annual sales of USD 4.7 billion.
2. Net margin
Plug Power aims to achieve an EBIT margin of 17% by 2024. That seems to me to be a bit optimistic. I still assume a long-term net margin of 11%.
3. Valuation level
Today the share is rated with a P/S ration of over 30. Apart from the large market and the political tailwind, I don’t see very many factors that should justify such a significantly above-average valuation level in the long term. I still assume a, for the manufacturing industry above-average, P/E ratio of 20 in the long term.
Is Plug Power fairly valued?
With these estimations, I expect an annual return of -4% over the long term. Indeed, still negative, even after the past corrections in the stock price.
Even in the very very optimistic scenario the annual return is only +6.5% and the yield of the investment at an assumed discount rate of 10% would still be in the red.
The bottom line is that none of the scenarios is anywhere near an attractive investment, especially given the existing risks.
The deviation from what the market sees is very large here. Of course, I can be wrong here – and as you know, there are no guarantees anyway. The large difference from my view to the markets view could probably result from different assumptions on the long-term growth rate of Plug Power.
- Large future market because of green hydrogen trends
- Fueld growth when government support packages kick-in, particularly in the US
- Plug Power is currently one of the leading companies in the market
- Well-known customers such as Amazon and Walmart
- It’s questionable how big the moat will be in the future
- Extremely high valuation level
- So far, no profit margins, and these will probably be relatively low to mediocre in the future
- Many risks from political dependency, price volatility, unclear accounting, permanent losses, etc.
The greatest opportunity for Plug Powers is the significantly large market that can get taken over due to the world putting effort into combating climate change and promoting green hydrogen. But, while Plug Power is in a big market, it is unclear to me how to justify its current rating. Based on objectively measurable criteria, Plug Power does not do well. There are three additional reasons why I don’t buy shares even after the price has more than halved since the latest all time high:
- It is unclear to me who offers the best technological solution on the market or will offer it in the future, there is not enough information in the market at this stage
- There is too much vision for me, too little of what already exists – especially after 20 years of presence in the market.
- In my view there are significant risks involved in the stock (e.g., due to mediocre creditworthiness, permanent losses, unclear accounting, and high price volatility).
This is why I give Plug Power in my personal rating a score of 33 out of 100 points.
There is of course always the possibility that I overlooked something and Plug Power can justify the current high valuation. I find the green hydrogen market personally very interesting. I will follow closely the developments around Plug Power and the stock price in the future and I am ready to be proven wrong, if the company develops better than anticipated.
In this content I am presenting my personal opinion as an active private investor. This content is not intended to provide investment, financial, accounting, legal, tax or other professional advice and should not be relied upon or regarded as a substitute for such advice.