If you listen to Plug Power's (PLUG -5.25%) management team, there's a ton of long-term upside to the company's business. Trillions of dollars are being invested into renewable technologies right now, including hydrogen fuel cells, which Plug Power specializes in. There's a case to be made that the company is primed to ride a tidal wave of investor interest.
Analysts at Goldman Sachs aren't so sure. In fact, according to a new research piece, there's one factor in particular that they are worried about.
Goldman Sachs analysts are worried about this 1 thing
Plug Power is all in on hydrogen fuel cell technology. The company was founded in 1997 for this purpose. Hydrogen fuel cells are electrochemical units that combine hydrogen and oxygen atoms to produce energy. Hydrogen fuel cells are already being used on a small scale in power plants, vehicles, spacecraft, computers, and cellphones. The issue isn't whether the technology works, but whether it works at scale at an economic price point.
According to the U.S. Department of Energy, "To be competitive in the marketplace, the cost of fuel cells will have to decrease substantially without compromising performance." When might costs fall enough to make hydrogen a viable fuel source for major parts of the world economy? It's hard to say, but there's a good chance this tipping point won't occur this decade.
Some research says that, even assuming regulatory tailwinds like increased subsidies and a carbon tax, hydrogen fuel cells may not be competitive until the 2030s. According to global consultancy McKinsey, "Industry is projected to drive the majority of clean hydrogen uptake until 2030, followed by a wider uptake in new applications by 2050." So there will be growth in demand this decade, but the biggest growth drivers for hydrogen fuel will be in the decades to come.
This brings us to Goldman Sachs and its recent research note on Plug Power stock. The firm's forecast claims that investors will remain skeptical of the longest-duration pockets of the equity market. Basically, what analysts are saying is that companies whose cash flows are far off into the future will struggle in today's market.
This makes a lot of sense. With both economic and interest rate uncertainty, these far-off cash flows will be extremely sensitive to shifts in investor expectations. Goldman Sachs estimates that Plug Power has an equity duration of 25.8 years. This is roughly the weighted average of the company's expected cash flows.
"Higher cost of capital has led investors to scrutinize unprofitable or highly levered equities," Goldman Sachs analysts conclude. That will be a problem for Plug Power. Its capital expenditures are on the rise as the firm attempts to scale its operations. The biggest demand drivers for its products, meanwhile, may still be years or even decades away. Plug Power may be tapping a potentially huge market, but the gap between today and when that market materializes may be too large in a market where the cost of capital is high and investors are wary of betting on distant cash flows.
Is Plug Power stock a buy, hold, or sell?
There's no doubt that demand for hydrogen fuel cells is set to grow in the decades to come. Last year, an estimated $1.7 trillion was invested in clean energy initiatives. But the vast majority of that money was dedicated to energy sources that are already economically viable, like wind and solar. Hydrogen may see its day in the sun, but it won't be in 2024. It may not even be this decade.
Even if Plug Power does everything right, it may struggle to survive financially until demand drivers pick up meaningfully. Already, the company is massively diluting shareholders through a $1 billion share issuance program, and just last year it issued a going concern notice -- that's an accountant's way of warning that a company may soon go insolvent.
Plug Power is stuck between a rock and a hard place. It's currently struggling financially, yet its biggest demand drivers won't appear anytime soon. For this reason, it's likely best to stay away from this volatile stock.
