What Can You Realistically Expect From Shares of Plug Power in the Future?

Here is the most obvious statement you will read all day: Shares of Plug Power (NASDAQ: PLUG  ) are expensive. I mean really expensive. Sure, you could convince yourself that you need to pay a premium for an emerging energy technology that has lots of potential in the long run, but how much of a premium should you pay, exactly? Let's put some numbers on paper to see what a long-term investor could actually expect from this fuel cell system manufacturer. 

Plug Power's Gendrive system in a Crown Equipment forklift (Source: Plug Power.)

What are we talking about?
Plus Power isn't a "fuel cell" company per se, as many may think. It actually builds fuel cell systems, which are basically a system to take a fuel cell -- manufactured by its suppler Ballard Power Systems (NASDAQ: BLDP  ) -- and makes them compatible with equipment powered by lead acid batteries. The fuel cells in these systems create electricity from pure hydrogen and create water as a byproduct. So far, it has been able to penetrate one rather niche market -- material handling equipment such as forklifts in warehouses and distribution centers. Over the past several years it has delivered about 4,000 units to companies such as Wal-Mart, Kroger, Coca-Cola, and BMW for its manufacturing and distribution centers. 

Plug Power's fuel cell systems are compelling for these companies because they offer two major advantages over traditional batteries: They have a higher energy density and can therefore run longer between charges, and recharging with liquid hydrogen is much faster than charging with electricity. Plug Power is also starting to test the waters in three more markets: refrigeration units for truck trailers, ground support vehicles at airports, and -- quite possibly the largest opportunity -- short-route delivery vehicles. 

Plug Power has been thrown into the news cycle recently thanks to a slew of news regarding some large orders and a couple of analyst upgrades. In the past six months, shares climbed to a peak of an absolutely absurd 1,500% and have now "settled" up more than 800% in that time frame. 

How to give a value to this company?
Like several of its peers that are developing innovative energy technologies that haven't exactly come into their own, Plug Power doesn't generate a profit. Heck, the company has yet to even post positive EBITDA in 15 years. With that in mind, there is really only one way we can give some sort of valuation to this company, and that is to measure the value assigned to its sales. For this, we'll use the company's price-to-trailing-12-month-sales ratio, which stands today at 31.

Considering how much the company's shares have jumped in the few months, it shouldn't be surprising that revenue growth hasn't been able to catch up. In fact, revenue has declined by 3.6% since 2011. Some of this can be attributed to struggling to gain market share, and some relates to manufacturing capacity. However, the recent order from Wal-Mart for 1,700 units as well as an expansion of its manufacturing facility should help put sales growth back on the right track.

Still, there are very few companies that are valued more than 31 times their total sales. The average price-to-sales ratio for the entire S&P 500 is 1.7, and even other high-flying energy peers don't have price-to-sales ratios greater than 10.

Company Price-to-Sales (TTM)
Plug Power  31
Ballard Power Systems  7.8
FuelCell Energy  3.1
Westport Innovations  5.4
Capstone Turbine  5

Source: S&P Capital IQ.

To justify such a premium, there has to be some fantastic growth coming down the pipe. According to S&P Capital IQ, revenue in 2014 is expected to reach nearly triple from 2013 and reach over $65 million.

Source: S&P Capital IQ. Author's calculation of compounded annual growth rate.

Based on S&P's projections, revenue is expected to grow at a rate of almost 100% over the next three years. To even the most ardent supporter of Plug Power, these figures seem overly optimistic, especially considering that the company's struggles to grow revenue over the past couple of years and that the entire industry is only expected to grow at a rate of 18.9% over the next five years. So let's take these growth figures with a grain of salt. In fact, better make that a bag of salt.

What will it take to grow into its stock price?
It's hard seeing this company being valued at such a premium, which gives shares of the company two options: The price of these shares drops to fall in line with its peers, or the company grows revenue fast enough to make its purchase price worth it. Then again, you probably don't want to buy a company that stays at the same price for several years. Somewhere along the way, those shares need to appreciate. 

So let's break it down. The following presentation shows revenue growth the company will need to achieve to both reduce its price-to-sales ratio to levels more in line with its peers just to maintain its current price, and revenue growth numbers for what it would need to achieve compounded annual returns of 8%, 10%, 12%, and 15%, respectively.

What these numbers go to show is that, for the most case, it will take some extraordinary sales growth over the next few years for the company's shares at today's prices to fall in line with its peers. However, if the comapny can sustain a compounded sales growth level of 25% -- very, very ambitious, but considerably less than S&Ps growth numbers -- and its price-to-sales were to fall within the range of its peers over the next decade, then it wouldn't be a stretch to assume that shares could attain a 10%-12% return per year. That would put today's shares of approximately $7 at $18 to $21 10 years from now. 

What needs to happen to make this possible?
Owning shares of Plug Power won't exactly be smooth sailing. If the price-to-sales ratio were to fall in line with its peers without a change in revenue, then someone who buys shares today could lose 75%-85% of his or her initial investment. Based on the large orders from Wal-Mart and the pilot studies with FedEx, this scenario doesn't seem very likely.

However, there are some major hurdles that could get in the way as well. Its current manufacturing facility will give it considerable room to grow sales, but it will max out unit sales in the $180 million-to-$200 million range. So within the next couple of years it will need make some significant investments to increase capacity if it wants to continue to grow five to 10 years from now. Also, the company actually needs to make money on these sales. According to company presentations, management estimates EBITDA breakeven at just over $58 million in sales. So it will take a significant ramp-up from today's sales numbers just to reach operational profitability.

What a Fool believes
Price-to-sales isn't exactly the cleanest way to value a company, but when companies like Plug Power don't have any earnings or EBITDA to speak of, there aren't a whole lot of other options. You probably didn't need to see these numbers to realize that Plug Power's share price is wildly disconnected with the current expectations for the company, but hopefully this will give you a more clear picture of what it will take from the company to actually live up to these expectations and what kind of returns you can expect over the next several years. Based on today's price and the potential challenges that Plug Power will face over the next several years to grow sales and become a profitable company, I would probably stay away from these shares until we actually see some tangible sales growth. 

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Read/Post Comments (14) | Recommend This Article (7)

Comments from our Foolish Readers

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 March 31, 2014, at 1:07 AM, OliverAZ wrote:

    I used to like the Motley Fool because you guys used to go against the grain and look at investment in a "foolish" way. But lately you sound like all the other analysts, especially the short sellers. Here goes another article to discuss the valuation of Plug Power. Yawn! Maybe one day you guys can do a little research and write a real article about the fuel cell industry and add some insightful commentary for investors.

  • Report this Comment On March 31, 2014, at 1:57 PM, pemonade wrote:

    This was a wishy washy Willy nilly comparison which pits motley fools quasi negative take on plug against the S and P take on plug power's projected growth. The article really didn't say much but the voice quality of the diction spoke volumes to me.It said ' do I really have to write another ordinary negative perspective on a stock that behaves like an enigma and keeps coming back?'I don't understand why analysts bother to write anything about it anymore.

  • Report this Comment On March 31, 2014, at 3:45 PM, fw190a8 wrote:

    This reminds of all the negativity on Las Vegas Sands when it went down to $1.65

    and I was picking up shares at 6-8 dollars and you fools kept writing articles about how its going bankrupt. Well, I wrote you fools to stop writing and buy some shares and make some real money, but you guys are fools aren't you.

  • Report this Comment On March 31, 2014, at 7:56 PM, monlette wrote:

    And how long did go without making a profit? I remember the days were people were saying its business model is unsustainable and it's only a matter or time before it goes belly up.

    The trouble with fuel cell technology is that it's great in principle, but nobody wants to put their infrastructure on the line to be a guinea pig.

    Now that Walmart has thrown their considerable weight behind it, I'm sliding my chips onto the table.

  • Report this Comment On March 31, 2014, at 8:26 PM, pchandl wrote:

    Evaluating Plug Power's technology as if it was a mature company like an Apple or an IBM is foolish. Plug Power is a growth company who has attained experience in marrying the fuel cell to a power storage devise, the battery. The fuel cell generates the electricity and the battery stores it to deliver the operating power needs of the motor. Plug Power has been able to deliver a portable energy producing transportation mechanical devise without the use of conventional fuel without harmful emissions or hazardous wastes. Plug Power's technology can realistically be scaled into the automotive market where the value of its technology could be multiplied many times over from its current value. So how does one put a value on the stock? It is not by using standards well established for mature companies in mature markets. That is what makes Plug's stock value indeterminate and interesting for speculators. So for investors who have risk tolerance I believe PLUG is perfect for them. Conservative investors should wait until more definitive progress is made by Plug but when that occurs the price of the stock could be much higher but not expensive from a fundamental perspective.

  • Report this Comment On March 31, 2014, at 10:31 PM, saveandmakemoney wrote:

    Plug Power will look expensive - all the way up the chart. The investment community has awarded Plug Power a "premium" valuation based upon the potential for strong forward growth in multiple fuel cell markets during the coming years. Plug Power has become a "cult" stock with very strong following of loyal investors who have embraced the "Green Energy" movement and consider Plug Power the "darling" of the Fuel Cell Sector. This explains the "premium" valuation to a new prospective investor.

    There is good reason to be excited... On a Year/Year basis last quarter, Plug Power has reported improving "fundamentals" by increasing revenues, increasing earnings, increasing the cash position and increasing the forward outlook for order bookings for the Fiscal Year 2014 to $150 Million. It is obvious that Plug Power has improved on a "fundamental" basis.

    We are primarily Energy Sector investors, but we also invest in "Turnaround Story" stocks. I disagree with your negative view. We have invested in Plug Power because of the "fundamental" improvements such as increased revenues, earnings, cash position and growth outlook going forward. Because of our experience in the Energy Sector, we know that Plug Power has the potential to morph into a Hydrogen Fuel Cell conglomerate.

    Back in May of 2013, it was The Air Liquide Group that invested in Plug Power - marking the beginning of a major reversal in the share price. It is important to note that The Air Liquide Group is a major industrial gas company of 50,000+ employees doing business all over the world. Do you think The Air Liquide Group did their due diligence on the "fundamentals" before investing in Plug Power? You bet they did. And, they were right. The share price of Plug Power has continued to rise - as the "fundamentals" have steadily improved.

    During Q4-13, Plug Power booked "repeat orders" from major Fortune 500 customers such as Walmart, Kroger, Mercedes Benz & BMW. Again, let me emphasize -- these were "repeat" orders to expand the fleets and follow-on orders.

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

    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.

    Each GenKey (Turnkey) Deal that Plug Power signs means a new, recurring revenue stream from Hydrogen Fuel Revenues & Service Maintenance Revenues (typically on 5 or 6-year terms).

    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. This is the 3rd GenKey (Turnkey) Deal announced in the past 4 months, which means the recurring revenue stream from hydrogen & service is increasing to a significant level.

    Because of the improving "fundamentals", we have added to our "long" position in Plug Power. We believe this is a "Turnaround Story" quickly transitioning to a "Rapid Growth Story".

    Let me explain why I believe 2014 will be the "Rapid Growth Phase" which the CEO of Plug Power has described as such:

    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 rapid move higher up to the $12 to $14 Range. 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".

    In conclusion, there is good reason for Plug Power to be awarded a "Premium" valuation. We suggest the author and others get used to it because the valuation will look expensive all the way up the chart.

  • Report this Comment On April 01, 2014, at 4:36 AM, whatsnext wrote:

    This is a really stupid article. PLUG is headed for all highs. They just reported yesterday and this company has allot going on. Im sticking with PLUG all the way to the top. Im looking at this stock to be over 20.00 if not more. You really should give the company allot more credit then what you did in this article. sounds like a paid bashing to me.

  • Report this Comment On April 01, 2014, at 11:38 AM, blizz83 wrote:

    So where exactly is PLUG going to get the cash to build a new facility to expand? You'll have to dilute existing shareholders considerably just for that.

    I understand the future potential, but why invest now?

  • Report this Comment On April 01, 2014, at 11:40 AM, blizz83 wrote:

    And more to that point... if fuel cell technology is really going to take off why is FCEL not being bid up to the same extent?

  • Report this Comment On April 01, 2014, at 1:51 PM, secularinvestor wrote:

    This is a weak, theoretical analysis which is totally divorced from understanding the realities of PLUG’s market and its huge growth potential and the recent stream of good news which shows the company has made a significant, transformational breakthrough.

    * In just ONE of its potential market - i.e. forklift trucks - PLUG's growth potential is HUGE . PLUG has 90% market share of fuel cell powered forklifts - so it is obviously doing something right.

    * Throughout their history they have sold a total of just 4,500 units in a potential market of 300,000 units in the US alone. There are similar sized markets in Europe and Asia, so there is huge headroom to grow its sales in the US and worldwide.

    * PLUG have made a very significant breakthrough by offering a turnkey solution (GenKey) whereby not only do they sell the fuel cell conversion for vehicles, but also the design and build of the whole hydrogen supply infrastructure, including the supply of hydrogen itself along with after sales care and maintenance of both units and infrastructure.

    * This has proved a very attractive proposition for customer companies because it significantly reduces the hassle and risk.

    * The recent deal with Walmart is huge: for a turnkey 6 warehouse deal for an initial 1,500 units. There are several more large deals in the pipeline

    * The advantage for PLUG is that the turnkey solution makes its proposition far easier to sell, while also tripling revenues from each unit sold.

    * The result has been a quantum leap in sales.. Their annual turnover was around $25 million. In the December 2013 quarter alone they secured orders for $50 million. In the March quarter they secured another $50m orders. They are confidently prediction $150 million orders in 2014 i.e. a 6 fold increase in sales.

    * In their earnings call they confirmed that with 3,000 units a year they achieve break-even. They have plant and personnel capacity to manufacture 10,000 units a year, which will result in very large profits.

    * In conclusion the market realities show that PLUG has made a very significant breakthrough and is set to grow far faster than the 25% a year which the author predicts is necessary to justify the current valuation.

  • Report this Comment On April 01, 2014, at 6:20 PM, fuelspace wrote:

    Today was an eye opener as I watched the debate regarding flash trading and legalities. I call this capitalization. Cramer does it every night, put out a book that I was going to buy but he along with others downgraded PLUG until it would not go any lower. This is worse than inside trading as so many of us count on a daily return. Since the big sting the day of the ROTH CONVENTION presentation I am afraid to even let Microsoft sit in after hours trading. I appreciate your views however, remember not all of us can afford 1000 shares of google or be deceived by a twitter ipo.

  • Report this Comment On April 01, 2014, at 6:23 PM, fuelspace wrote:

    Actually, I have been following the fuel cells and solar powered information. We, need this for the future and Ballard is already supplying the buses in Europe and is part of Azure in China. Please get to some important facts.

  • Report this Comment On April 01, 2014, at 8:15 PM, vinipoooh wrote:

    Great article. Plug is a great company but I have to agree that share price has gotten way ahead of company's valuation both technically and fundamentally.

  • Report this Comment On April 02, 2014, at 11:02 AM, keithbdi wrote:

    If SLA's are near their limit (current density), what other options do fork lift and other high current surge type applications have? Don't say Litium-ion, because of price and long charge time. Only hope for an alternate to PEM fuel cells is Telsa, and if they build their gigabattery factory and that won't be until 2017 (maybe). In short your analysis left out the most important factors.

    P.S. FCEL uses a solid state fuel cell that requires a natural gas supply (so it can remove Hydrogen from the gas) and is not comparable in price or size.

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