What happened
Shares of Plug Power (PLUG -0.73%), an industry leader in fuel-cell solutions, soared 29% in March as investors took kindly to the company's release of its fourth-quarter earnings report.
What were they so charged up about? It certainly wasn't the company's revenue growth -- or lack thereof. Plug Power reported $86 million in sales for fiscal 2016, far short of the $103 million it reported in fiscal 2015. And it wasn't news of the deal with Amazon, which wasn't announced till last week. So let's dig in deeper and find out what powered investors' enthusiasm.
Image source: Getty Images.
So what
Unfazed by the company's shrinking top line, investors, instead, celebrated several of the company's accomplishments during the past year. For one thing, Plug Power achieved exceptional margin expansion. Whereas the company reported a gross margin of negative 9.6% in fiscal 2015, it managed to report a gross profit in fiscal 2016 thanks to a gross margin of 4.6%. Plug Power reduced expenses in several areas, but the margin expansion was largely attributable to the company's sales of its fuel-cell systems and related infrastructure, which reported a 26.1% gross margin -- nearly double the 13.1% it reported in the prior year. Providing optimism for the year ahead, management revealed its gross margin forecast for fiscal 2017 of between 8% and 12%.
The company's contract bookings in fiscal 2016 also pleased investors. Reporting $280 million in bookings for last year, Plug Power achieved management's forecast, which it issued in the first quarter, of more than $275 million in bookings. And suggesting that fiscal 2017 will continue to prove the viability of fuel-cell solutions, management forecast contract bookings to reach $325 million. The growth in contract bookings for fiscal 2016 -- an improvement over the $205 million in 2015 -- and forecast for the coming year are auspicious signs for the company as it works to prove that fuel-cell solutions are a legitimate option in spite of the expired investment tax credit.
Last, the company succeeded, for the first time, in achieving breakeven on an operating cash-flow basis in the fourth quarter. Investors who have remained bullish on Plug Power undoubtedly recognized this as vindication; moreover, they were surely spurred on by further comments about profitability from Plug Power's CFO, Paul Middleton, who said management expects that operating expenses in the coming year will be comparable to last year, and this will "serve as one of the key drivers putting [the company] on the path for EBITDAS breakeven or better later this year."
Now what
The company's year-over-year revenue drop notwithstanding -- Plug Power began utilization of new power purchase agreement financing in Q1 2016 -- it deserves credit for its several accomplishments: gross margin expansion, contract bookings growth, and operational cash flow breakeven in the fourth quarter. But these accomplishments must be taken with some grains of salt.
First, the company's 4.6% gross margin is well below management's forecast of more than 12% that it issued in Q1; consequently, investors must be skeptical of the forecast range of 8% to 12% for fiscal 2017. Similarly, investors should be circumspect in how much weight they give to management's forecast range of $25 million to $35 million in operation cash outflow for fiscal 2017. Like the gross-margin miss, management reported negative $30 million in operational cash flow for fiscal 2016 -- considerably worse than the $20 million operational cash outflow it had forecast in Q1.
In all, Plug Power deserves kudos for its accomplishments, but prudent investors must not be blinded by these minor bright spots. Nor should they conclude that the company's future success is guaranteed following the news of large deals with popular companies like Amazon, for it still remains tenuous at best.
