Is Plug Power Inc Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Plug Power (PLUG -6.95%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Plug Power's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Plug Power's key statistics:

PLUG Total Return Price data by YCharts,

Source: YCharts. * Period begins at end of Q1 2011.

PLUG Return on Equity (TTM) data by YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Plug Power comes through with a surprisingly strong four out of seven passing grades today -- surprising because two of those passing grades were awarded due to quirks in the way negative EPS works. You can clearly see net income tanking during the past few quarters, and yet Plug Power's EPS is two-thirds higher than it was three years ago because the company's share count is 10 times larger than it was three years ago. Dividing a negative number by a much larger divisor makes it look smaller, and the rapid-fire issuance of new shares has made it difficult to keep track of Plug Power's EPS consistently; but make no mistake, Plug Power has not been improving its EPS. Can it? Can Plug Power finally push its fundamentals to a level worthy of the hype heaped on it lately? Let's dig deeper to find out.

Plug Power caught fire late last year after management announced major deals and promised profitability in 2014. Shares nearly tripled in a single week on the news, en route to topping out at an astounding gain of more than 2,500% for the past year. Other key news drivers were reports of a deal with FedEx in January, and a larger deal with Wal-Mart (WMT 1.32%) in March. Since its insane peak just after the Wal-Mart deal, Plug Power has dropped precipitously, but it's still one of 2014's best stocks with a year-to-date gain of roughly 175%. The source of the market's optimism was fairly easy to find; but what changed investors' (or speculators') minds about Plug Power in early March?

Well, the same things that can help a tiny company with minuscule revenue become a 25-bagger in six months can easily undo all of those gains, and the hype cycle has turned against Plug Power recently despite the fact that the company does seem to be delivering on its promised sales growth. As Fool energy specialist Tyler Crowe has pointed out, to justify its price in March -- shares have since dropped 40% -- on a price-to-sales basis, Plug Power would need to produce some extraordinary annualized sales growth, even if it's to simply get its P/S ratio down to the level of its own supplier, Ballard Power Systems (BLDP -2.68%).

Tyler Crowe has also pointed out recently that Ballard Power is much closer to profitability than Plug Power. For a long time, Ballard was pricier on a P/S basis than Plug Power, but since Plug Power has gotten most of the fuel-cell attention during the past year, the two companies have reversed roles in a big way:

PLUG EBITDA Margin (TTM) data by YCharts.

Plug Power isn't the priciest stock on the market on a P/S basis -- far from it. But when you strip out most of the biotech stocks that dominate the high-end of the P/S rankings, you won't find many companies that have higher expectations placed on them. Screening tool Finviz counts only five stocks in the technology sector with market caps in excess of $300 million with a higher P/S ratio, and none in the industrial-goods sector, which is a more accurate categorization for a company that manufactures alternative-energy forklifts.

Plug Power doesn't even have as large an addressable market as Ballard, and yet, investors have placed sky-high expectations on it that may never be feasibly reached. This divergence alone should be cause for skepticism. Further adding to the problems blocking Plug Power's potential is the assertion by many -- including Tesla Motors' (TSLA 12.06%) Elon Musk -- that fuel cells are simply an inferior way to power vehicles. Musk, himself, is on record as saying that "fuel cells are so bulls**t," which is as strong a rejection as any you're likely to get from the world of alternative energy.

On the other hand, Plug Power is growing its bookings at a phenomenal rate. By the end of its first quarter, the company's bookings had doubled year over year, and the company also continues to expand its customer network to reach other major multinationals beyond just FedEx and Wal-Mart, the latter of which has committed to install more than 1,700 GenDrive units at six locations. The problem is that, as it grows, Plug Power becomes more unprofitable -- its margins cratered in the first quarter as orders boomed. Investors have bet that this will change, and Plug Power continues to claim that it will be profitable by the end of the year. If that happens, it might begin to justify investor optimism -- but it would only be a beginning, until the company proves that it can sustain profitability while meeting everyone's expectations for explosive growth.

Putting the pieces together
Today, Plug Power has some of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.