Plug Power: A Tale of Two Futures

What the Plug Power optimists and pessimists hope will happen.

Jul 11, 2014 at 10:14AM

In the market today, there are three types of investors. One group of investors consists of optimists who always see the glass half full. Another group of investors always examines the glass with a critical eye. And then a third group of investors is willing to join either group if the right facts and conditions present themselves.

Given Plug Power's (NASDAQ:PLUG) roller-coaster ride, it is fair to say that all three types of investors are monitoring Plug Power.

As an investor, it is important to understand the other side's perspective. Here are the scenarios that the pessimists and optimists are calling for and why they believe those scenarios will unfold.

The pessimist's case
The pessimist don't believe management can change. A leopard can't change its spots, and Plug Power management won't suddenly begin to execute after nearly a decade and half of not executing. Bearish investors point to management's history of optimistic guidance and disappointing results. They also point to the approximately $850 million in total losses and the 14 years of failing to make the business model work. 

The pessimist believe that given Plug Power's high valuation, the odds are very much against Plug Power. Given that the company didn't win many contracts until recently, the pessimist don't believe the company can win enough new contracts to justify the valuation as there is not enough market demand for Plug Power's products. 

As a consequence of the company not winning enough contracts, the pessimists believe that Plug Power will continue to burn through cash. They believe that as management continues to disappoint in the coming earnings releases, more and more optimists will leave the stock in frustration, sending Plug Power significantly lower.

The optimist's case
The optimists believe that this time is different. They believe, specifically, that there are enough tailwinds in terms of a larger market and more interest in fuel cell fork lifts that Plug Power can turn a profit. 

And although Plug Power is overvalued versus other fuel cell companies such as Ballard Power Systems (NASDAQ:BLDP), the company does have 85% of the fuel cell-powered material handling equipment market. While the market is very small, given the right execution, there is potential for significant growth as the total addressable market may be anywhere between $4 billion and $20 billion. 

For the optimists to be happy, Plug Power does not necessarily have to make profit right away; the company does need to win an order of magnitude more contracts in the coming years while at the same time controlling costs. The optimists hope that Plug Power will have enough positive cash flow to fund its growth without issuing more shares while at the same time improving its product.

If all of this happens, Plug Power can continue to rally.

The bottom line
The investors on the sidelines are waiting to see whether Plug Power management can really execute. If management does manage to win significantly more contracts that justify the market cap while at the same time reducing production costs, those investors may consider investing in Plug Power. 

If that scenario doesn't happen, those sideline investors are content watching Plug Power's stock price grind lower as the optimistic investors give up. 

In my opinion, being on the sidelines and enjoying the show is probably the best bet for now. 

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Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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