Do you think the CEO of Plug Power Inc (PLUG -6.95%) is feeling a little pressure today? Yesterday Citron Research, a well-known short seller, said Plug Power is a casino stock worth just $0.50 because management consistently makes inflated claims that it cannot match. Maybe there will be one or two analysts out there looking for reasons to shoot holes in Citron's claims? Maybe Rob Stone from Cowen, who was singled out in the report for making consistently bad calls, will be trying to defend his reputation as an analyst? When was the last time an earnings call carried the political drama of House of Cards?
Citron's report seems to claim that the company is a Ponzi scheme that will never make any money for shareholders. By continually selling more stock at lower and lower valuations, the management has no belief in the business. The one thing that will turn this around is success, and if it does, watch out. Everybody who was scrambling to short the stock yesterday, minutes before Andrew Left spoke on CNBC, will be forced to cover. The good thing about Wall Street is that there is a short memory and future profits erase past indiscretions. Citron is right about one thing: This is a show me company now.
Don't overly focus on order growth
I don't usually say this, but don't focus on order growth. The company said that it met its order target of $32 million in bookings, and first quarter bookings will be above the fourth quarter's. However, order growth without profits is like beating your six year old nephew in poker -- you may win, but it isn't satisfying. Management is expected to be ultra-bullish about order growth and we already know that. Negative gross margin business needs to turn from being a loss leader to a high-margin profit stream, and the company has not proven that it can do that yet. In short, the management team has problems to fix before order growth will translate into profit growth.
Product and service revenue should be your prime concern
Plug Power groups product and service revenue together which is extremely strange. Usually companies separate the two because the margin on the two lines of business is so different. It allows analysts to understand the differences between the upfront revenue boost, the ongoing stream of services revenue and impact on earnings from the different profitability levels.
In September, there was no growth in product and services revenue -- it actually declined 2.5%. This should be accelerating dramatically from here since the company is beating its order targets.
Contract wins need to be for multiple products
The recent contract win with Wal-Mart does provide hope that has turned into a high valuation. The details behind it seem to indicate that the purchase is not a one-time event, but the potential opening of a door to a lasting relationship. The press release states that Plug was selected to provide fuel cells, hydrogen, fuel infrastructure and maintenance service.
If this is the case it will not be a one-time sale. The sale of fuel cells opens the door, probably at a negative gross margin, then the fuel to power them and the support on the maintenance is where the company makes a profit. This would be like Gillette almost giving away the Mach 5 then profiting from the sale of blades. If this works out well, why wouldn't Wal-Mart want to expand the relationship? In addition to Wal-Mart, the company brought up an extensive list of consumer goods companies that is too long to list here. The key with contract wins is to see that the company is closing deals for the ongoing service and fuel. If its clients are just looking to get a tax break, they only need to purchase the equipment.
Profitability must meet future targets
This is the biggest problem, and it wont be resolved on tomorrow's call. Today, for every $1 of product and service revenue, the company loses $1.87. Right off the bat, before taking operations into expense. There must be a shift from negative margin business to profitable business soon to offer earnings support for the share price.
On the January update, the company guided to be EBITDA breakeven in the second or third quarter. I don't like EBITDA as a measure for valuation, but at least in this case, it gives the management a target to shoot for. Clearly after the claims made by Citron, Andy Marsh, Plug Power's CEO, will be taking out all the stops, and addressing this point head on will be key. If Mr. Marsh cannot meet this low target with such a strong pipeline, it will show that customers are simply using Plug as a conduit to a tax break and that Plug cannot control its profitability.
*If you'd like an explanation of why I don't like EBITDA, send me an email or a message on Twitter.
You be the analyst
I disagree with Citron's analysis of Plug Power as a casino stock. Some people use it as a casino but others see it as a jackpot stock. If the company turns the business around, there could be much more room to run, but Citron is also right that the fundamentals don't support that thesis playing out. As investors you have to watch the fundamentals on your own because by the time you read my analysis of earnings, the stock may move another 50%.
