Why Investing in Plug Power Is a Dangerous Game

Editor's note: A previous version of this article did not properly clarify Tesla's profitability. Tesla recorded a non-GAAP profit in 2013. The Fool regrets the error. 

We at The Motley Fool believe in discovering solid companies with strong business models and investing in them for the long haul. Yet it's hard not to notice when a stock shoots up, seemingly out of nowhere, much like Plug Power (NASDAQ: PLUG  ) has done in the past year. The alternative energy stock has gained as much as 912% in the last six months and more than 2,885% over the past year. Taken at face value, it can be tempting to want to jump in and ride the rally. I mean, who doesn't want to lock in gains like that?

But a closer look at Plug Power and its volatile history reveals the hidden pitfalls of investing in speculative stocks such as this. Here's why putting your money into Plug Power is a dangerous game.

Source: Plug Power

Speculation at its best
Don't get me wrong, I'm all about momentum stocks when the risk-reward balance is right. After all, I've owned shares of Tesla Motors (NASDAQ: TSLA  ) since 2011 when the electric carmaker was the most shorted stock on the Nasdaq. Tesla, which also plays in the alternative-energy space, has enjoyed a nice run since then with the stock up more than 553% in the past year. But unlike Tesla, which has proven it can deliver investors profits, with a non-GAAP profit this past year, Plug Power has been in the red for the past 16 years.

Another worrisome trend is the volume at which Plug Power's stock is trading hands. "Over the past 10 days, average volume has risen to an average of 129 million shares a day, well above the float of 88 million shares. On two separate days last week, every share of Plug Power available in the market was traded an average of three times a day," according to a report from Fortune. But that's just the tip of this iceberg.

A separate report from Citron Research calls Plug Power a "casino stock": "[T]he recent volume and share price surge in Plug Power demonstrates how Wall Street treats this stock: nothing more than a casino." Citron accurately points to Plug Power's history of over promising and under delivering. In spite of that, it's important to keep in mind that Citron Research is a company that's made money in the past by shorting the very stocks it publicly trashes in its reporting.

Could this be history repeated?
Citron Research aside, there are still plenty of red flags when it comes to Plug Power's long-term prospects. Wal-Mart's decision to purchased more than 1,700 GenDrive fuel cells from the company fueled the momentum in shares of Plug Power this month. But a single contract with a major retailer hardly justifies the stock's 60% gain during the past month.

With the stock now trading near $6 a share, much of the future growth is already priced in. As fellow Fool Travis Hoium explains, Plug Power "would need to take in 10 orders the size of Wal-Mart's just to come close to living up to its current valuation and that's a tall order." Importantly, this isn't the first time mega speculation has rocketed Plug Power into space. The company's stock price surged to $1,500 in early 2000, only to come crashing back to earth last year when it touched a low of $0.13 per share, according to Fortune.

Critics now argue that the stock could be headed for a similar pullback in 2014. There's no doubt that the promise of alternative energy, particularly fuel cells, is an exciting market today. But the key is finding companies with a well-balanced approach to risk and reward. At this point, I'd like to see Plug Power land some more Wal-Mart sized contracts before I'd even consider jumping in.

A profitable alternative to owning Plug Power
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Read/Post Comments (13) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On March 24, 2014, at 1:59 PM, ballcoach wrote:

    Tamara, you posted, and I quote, "...But unlike Tesla, which has proven it can deliver investors profits...."

    Tell me? Do you live on this planet? Tesla has been in business for what, 11 years? Can you name a single year of profitability? Can you name a single quarter of profitability without using ZEV credits?

    If you're a whiz at stocks, perhaps you can take a few finance courses to get a better grip on reading Financial statements.

  • Report this Comment On March 24, 2014, at 2:23 PM, alj177 wrote:

    Wow that was a pretty bad read. Wasnt expecting this at the Fool.

  • Report this Comment On March 24, 2014, at 2:25 PM, HIFCE wrote:

    Now if you did research into ACAL Energy, PEM Electrolysis Development Outlook 9.04.2013, CETH2, you will find that U.S.A. is not the leader in PEM fuel cell technology. This technology has grown leaps and bounds check out Honda FCX Clarity. Toyota/BMW development of FCV technology. Everyone needs to learn about PEM fuel cell technology which will rock this planet.

  • Report this Comment On March 24, 2014, at 2:34 PM, tocarnesi wrote:

    The Motley Fool,

    Why do you relentlessly bash Plug Power Inc. or symbol PLUG?? Why don't you bash companies that deserve to be that have little or no shareholders/investors transparency.

    Thomas

  • Report this Comment On March 24, 2014, at 3:04 PM, saveandmakemoney wrote:

    Plug Power's share price has move up for multiple reasons - not just one (1) contract with Walmart. It is multiple contracts ("repeat orders") that have attracted investors to this "turnaround story" which is quickly morphing into a "growth story".

    With the momentum building, we believe Plug Power will announce additional new customers very soon. Not surprisingly, you did not mention that Plug Power has recently signed a "Turnkey" contract with another "unnamed" Auto Manufacturer. This will be the 3rd Auto Manufacturer customer for Plug Power which already has Mercedes Benz and BMW as customers. In the future, Plug Power may sign "all" of the Auto Manufacturers around the world - if this strong trend continues.

    The overall trend of increased Order Bookings is showing significant growth. And, clearly, there has not just been one (1) contract with Walmart that has fueled the bullish sentiment toward Plug Power.

    In Q4-13, Plug Power booked a multiple-site order from Kroger using Plug Power's GenKey (Turnkey) solution, which includes GenDrive Fuel Cells, infrastructure, service, and hydrogen fuel.

    In Q4-13, Plug Power had "repeat orders" with key material handling giants Walmart, Kroger, Mercedes Benz, and BMW, resulting in fleet expansion and follow-on orders. These orders included both products and recurring revenue for service.

    In Q1-14, Plug Power announced receipt of a huge, record-sized 6-Distribution Center Turnkey Order from the world’s largest retailer, Walmart, using Plug Power's GenKey (Turnkey) solution, which includes products (1,738 GenDrive Fuel Cells), infrastructure, 6-years service, and hydrogen fuel.

    With increasing orders to fill factory production capacity, Plug Power will realize cost-savings due to economies-of-scale as well as shorter lead-times to shipment (revenue booked), which will increase Gross Margin from 25% to approaching 30% in Q4-14.

    Other companies see the “huge” order from Walmart as a selling point – and have placed new orders with Plug Power during this quarter (Q1-14).

    On March 13, 2014, Plug Power announced receipt of a GenKey (Turnkey) Order from an “unnamed” car manufacturer. The details of this new order will soon be announced.

    The CEO of Plug Power, Mr. Andy Marsh, confirmed on the March 13th Conference Call that all three (3) of the newly emerging adjacent fuel cell markets will be getting shipments during 2014! This is clearly a "rapid" expansion which means that Plug Power will be receiving three (3) additional revenue streams.

    Plug Power will start with the Transport Refrigeration Unit (TRU) segment because infrastructure is already in place. Plug Power will leverage existing customer relationships with SYSCO, Walmart and Kroger - each of which is involved in chilled food distribution which needs TRUs.

    Thereafter, Plug Power will expand into Ground Support Equipment (GSE) segment (Airport Tuggers, etc.) and the very exciting Range Extender segment which combines a Plug Power Fuel Cell with a Li-ion Battery Vehicle to reportedly "double" the mileage range.

    We are looking forward to an "update" on the test taking place in the LA Basin in California with FedEx Express & Smith Electric Vehicles - testing Plug Power's Range Extenders to confirm and validate that the Range Extenders "double" the mileage range of a Li-ion Battery Vehicle from 80 to 160 miles! When the news is released on this, I expect Plug Power's share price to make a major move higher. The Range Extender "niche" market includes Parcel Delivery Trucks, Postal Trucks, Taxis and Port Utility Vehicles...but, it could morph into the overall enormous transportation market. This is indeed a very exciting new market about to be entered. To get a sense of the investor community embracing this new "niche" market segment of Plug Power, when the deal was initially announced with FedEx Express & Smith Electric Vehicles, Plug Power's share price gapped-up higher for several days in a row.

    We believe the "fundamental" improvement trend of increasing revenues, increasing earnings, increasing cash position and an increasing order booking trend shows clearly that Plug Power has entered a "Rapid Growth Phase".

  • Report this Comment On March 24, 2014, at 4:39 PM, overland33158 wrote:

    Ah, the pump have dumpers have arrived to slam anything critical of their "company" that has bled out from day one, lies to the stockholders and dilutes the stock to the point that fair value is a dime. This symbol will be gone this time next year with bodies lying in it's wake. The only stock that is more embarrassing from a business standpoint is Vape, With zero sales, zero revenue, and zero R&D. The only solace on that t u r d is people finally noticed and dumped it at an accelerated clip. Vape will be single digits in less than 2 months, and Plug will be lucky to hold a dollar. Just in case anyone is wondering, i don't own either of these stocks, but I don't appreciate being lied to. The people that buy these :"stocks" are the same people that post as an "anon" in forums using terms like wow, unbelievable buy, hurry. #Scam

  • Report this Comment On March 24, 2014, at 4:54 PM, blueed wrote:

    To: saveandmakemoney, You comment was ten times more informative than the loose MF article above. Thanks for the fact info. Plug has value and growth.

  • Report this Comment On March 24, 2014, at 6:28 PM, Greggg wrote:

    "Saveandmakemoney" Thank you for so eloquently spelling out PLUG's business plan, which was obscured by the continued Bashing articles that appear both on the Fool and other paces, like Seeking Alpha,

    I would add that PLUG is ALSO entering the materials-handing market at airports, as they move baggage to-and-fro. This too will represent an additional revenue flow to PLUG.

    Thanks!

    Gregg

  • Report this Comment On March 24, 2014, at 8:25 PM, nazcar4u wrote:

    "saveandmakemoney" I agree 100% with "blueed" and "Greggg" your reply is the same info I keep telling other friends who invested in PLUG. You comment was Ssooooooooooooooooooo much better than the pooorly thought out rag peice that Motley Fool published above. I joined merely to comment on what a load of BS this article was and will now cancel.

  • Report this Comment On March 24, 2014, at 9:56 PM, summerfield101 wrote:

    I think some thanks should be given to "overland" for demonstrating the most typical con argument against PLUG, showing a complete lack of substance or counter arguments to the many positive, real current and likely coming developments on the horizon. And the author of article, using Andrew Left and Citron as a major reference shows the depth, or lack thereof, of her position in relying on such a questionable source. How did Toyota's bet on the Prius pan out? From an article at Seeking Alpha: "Toyota has been excited about fuel cells for some time, and at last week's 2014 CES event, Toyota unveiled its fuel cell concept vehicle, announcing plans to introduce it to the market in 2015. Bob Carter, Toyota's Senior Vice President of automotive operations, believes the company's fuel cell vehicle represents what the Prius represented 15+ years ago; a compelling technology that received criticism and was slow to catch on at first, before becoming the best selling hybrid vehicles and one of the top selling cars in the world." And: "Interestingly enough, Toyota has teamed up with Plug Power's partner, Air Liquide, to build more than 100 fuel cell stations between four major Japanese cities within two years. The automobile company is also targeting California due to their growing base of fuel cell stations, expected to reach 30 by 2015. Toyota claims 68 fueling stations between San Francisco and San Diego could support 10,000 fuel cell cars. " That is in the future, but for the present, PLUG has brilliantly chosen the materials handling market to establish and grow, sustainably, a leadership role in a hydrogen future. They have deals and coming deals with companies that might have some interest in a hydrogen future but only if it is financially compelling NOW. Maybe ask WalMart, Kroger, BMW, Mercedes-Benz, etc, etc., how compelling they find "overland's" argument.

  • Report this Comment On March 25, 2014, at 1:09 AM, Georgewdunce wrote:

    TARGET PRICE FOR plug, $2.5

    I cannot believe watching PLUG almost heading to $12, and I had 20,000 shares i sold at $0.5 not long ago.

  • Report this Comment On March 25, 2014, at 10:21 AM, keithbdi wrote:

    Tamara:

    No offense but this is an example of finacial analysis without understanding the technical issues

    and limitations of SLA's (sealed lead acid). Its all about surge currents in the load. Similar to acceleration in electric cars. The higher the accel

    and duration the greater the demand on the SLA.

    In the Fork Lift application it is the same surges

    but more often and heavier. So the bottom line is,

    SLA are at their limit range - move over - and let the fuel cell do the future work. The demise of SLA's in high surge applications is inevitable.

  • Report this Comment On March 25, 2014, at 10:36 AM, seageezer wrote:

    I absolutely agree with you that Plug is a risky bet. even though I believe in this company and will be buying back in when trading stabilizes.

    I would like to question one of your referred sources, specifically Citron. I do not understand why this source receives any acknowlegement. Citron is a one man operation with an admitted questionable background and no credible references of expertise.

    Citron's only goal is shorting, using vary skewed stats. I would like to hear what your basis for citing Citron is?

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