How to Power a Fuel Cell Company

Plug Power Inc (NASDAQ: PLUG  ) touts its success in hydrogen fuel cell systems by flaunting the 4,500 GenDrive fuel cell units that are deployed to major U.S. material handling corporations. As the number of power units supplied by Plug Power grows, the company has the potential to make a huge profit and expand the reach of the technology beyond just material handling. Can the company live up to its potential, or will it run out of juice before the technology can completely catch on?

Existing sales are small but meaningful
Apple sold 237,000,000 products (iPhones, iPads, and Macs) in 2013. Plug Power has deployed 4,500 units since the company was founded. Though it may sound like a menial number when compared to sales from the electronics giant, 4,500 is substantial in the field of fuel cells. Plug Power is beginning to establish a sturdy base of notable material handling customers that should enable the potential for more substantial future sales if it is able to deliver on the performance claims expected from the GenDrive units.

Plug Power's attention to material handling applications has allowed the company to optimize a fairly uniform set of products rather than try to expand to a wider spread of markets, as has been the approach of a major competitor in Proton Exchange Membrane (PEM) fuel cells, Ballard Power (NASDAQ: BLDP  ) . While there are advantages to reaching a wider market base, Ballard Power needs to simultaneously advance the technology of each of the related but still different fuel cell applications of material handling, backup power, public transportation, and distributed generation. The available markets are multiples greater in magnitude than that for just materials handling, but the broadened range of needs and specifications for each separate market makes technological dominance in any one field much more difficult.

By narrowing its focus initially to materials handling applications, Plug Power will better be able to focus its development efforts. In establishing limited sales but at the same time providing the entire fueling infrastructure and servicing for every unit deployed, Plug Power is ensuring that every sale made is a meaningful sale. If existing customers can make a relatively seamless transition from lead-acid batteries into hydrogen fuel cells, continued sales and servicing contracts to these customers will provide a strong base on which to grow, while brand reputation will translate to new contracts with new customers in materials handling.

New contracts will be key
Existing sales and the corresponding servicing will keep Plug Power viable in the short term, but generating new contracts is the only way the company will be able to live up to its growing $400+ million market cap.

The recent announcement of a new multi-site contract with an unnamed retailer to provide 1,500 GenDrive units along with the accompanying GenFuel hydrogen, GenFuel fueling infrastructure, and GenCare service is one such agreement that shows the company's potential. The deal will substantially expand Plug Power's presence in materials handling and provide additional exposure that is likely to draw attention and interest from other major retailers. Where there is additional interest, there will be additional sales.

The takeaway
Plug Power and Ballard Power are two commercial-scale players in PEM fuel cells worth considering as an investor. The two companies approach the field with different business plans: Plug Power focusing initially on the narrower materials handling market and Ballard Power broadening its reach to more diverse applications. Put simply, Ballard Power is seeking market reach, while Plug Power is seeking market domination. While the grander vision of Ballard Power may have promise, Plug Power's refined focus and all-inclusive implementation should lead to steadily increasing sales and more stable long-term growth.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 13, 2014, at 10:38 AM, Unkiemoe wrote:

    Plug does not produce fuel cells ! Their GenDrive system is powered by Ballard Power BLDP fuel stacks . Ballard is a vendor to Plug not a competitor . Do your homework next time before you look like a fool !

  • Report this Comment On February 13, 2014, at 11:16 AM, ICanFool wrote:

    PLUG Power has 85% of the fork lift PEM fuel cell market Apple does not have 85% of the cellphone market. what a comparison.

    1 cell phone =300$

    ! Gendrive= not 300$, may be 30000$ + residual from H2 sales ongoing revenue.

    PLUG POwer took a page from General Electric Aircraft Engine sale model and servicing contract (for life?). GE had mentored PLUG Power in the early stages of existence. Finally they found the chemistry. Bush dynast Invest in hydrogen economy while invading IRAQ, paved the way to bring back the camels to middle east as the favored vehicle. Long Live Bush! Our dependency on middle east oil is almost over. LOL

  • Report this Comment On February 13, 2014, at 11:22 AM, ICanFool wrote:

    Shamus, your knowledge about the unknown ares is scary and bring a bad rap to North Dakota State University !

    Read, Read and Read. I am surprised to see you have a PhD!

  • Report this Comment On February 13, 2014, at 1:28 PM, jaketen2001 wrote:

    Shamus,

    Nice overview. Its seems like more and more people are taking a look at fuel cells. I would pick a bone with your take away, that Ballard is risker than Plug because Plug is focused on dominating one market while Ballard is spreading itself thin with market reach.

    Fiveish years ago both companies were at the crossroads of changing their business plans or bankruptcy. Plug actually got OUT of the fuel cell stack making business and went all in with integrating them in to material handling products. Their sole supplier, at the moment, is Ballard. Ballard took the opposite tack. After sinking hundreds of millions of dollars in to refining fuel cells for automotive applications, they got out of the integration business. They wanted to let other business partners risk capital integrating the fuel cells. Ballard would just engineer and manufacture the fuel cells.

    The result of this at the moment, is that Plug has negative gross margins on the units its sells because it spends gobs of money making engineering refinements on the units it sells. Constantly tweaking and optimizing them for each customer, with occasional QC issues.

    Ballard, while also losing money, has positive gross margins on the fuel cell stacks it sells to Plug, and to all its other customers. Ballard has been forced to re-integrate itself in to vertical sales channels in telecom because its business partners have gone belly up. Hopefully blowing their own equity on the lion's share of engineering refinements and market development, and letting Ballard pick up the wreckage profitably. Ballard is also vertically iterated in to distributed generation, but it is not a market they put a lot of capital in to. But in 2 large markets for Ballard, material handling and buses, Ballard will let the its partners assume much of the cost and risk of market integration.

    So really, Ballard has a wider sales footprint on the world, a more diverse sales mix, and better margins. That is not more risk, that is less risk. Plug could get cut right off at the knees if Toyota decides to leverage its auto fuel cell experience to material handling products, where is the world market leader in sales by a margin of 3-4x over number 2.

    Fuel cells are coming, and all the luck in the world and congratulations to Plug. But Ballard is much less risky.

  • Report this Comment On February 13, 2014, at 1:47 PM, geltstavern wrote:

    Shamus, how much DD did you put in before putting pen to paper on this article? Plug makes the GenDrive, Ballard supplies the fuel cells. 2 seperate business with one selling to the other...As a paying member of Motley Fool, I expect a little more please...

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