Is Plug Power Finally Reaching Critical Mass?

How long can you lose money? Investors in Plug Power (NASDAQ: PLUG  ) have painfully been finding out that as long as a company can raise new money, it can keep plodding along while bleeding red ink. New orders from Wal-Mart (NYSE: WMT  ) could be a signal that the turning point is near, though. That would make Plug Power and its hydrogen fuel cells an instant green darling (again).

Make it stop!
Over the past decade, Plug Power hasn't turned an annual profit once. Not a single year. In fact, over that time span it's lost a cumulative sum of over $45 a share. The fact that it was able to raise over $100 million in new capital in the first quarter via an equity sale is a testament to the potential of Plug Power's hydrogen cell technology.

It also might be a statement about the relationship that Plug Power is cultivating with Wal-Mart, the world's largest retailer. Plug Power is in the process of installing a turnkey hydrogen fueling solution at a Wal-Mart distribution center right now, with another five facilities on tap. The order includes over 1,700 fuel cell units, infrastructure construction, and hydrogen fuel supply, as well as a six-year service contract for each site.

(Source: Aled Betts, via Wikimedia Commons)

This is a big deal for Plug Power for several reasons. First, those 1,700+ Wal-Mart hydrogen units helped to improve the company's backlog from just over 1,400 units to more than 3,700 at the end of the first quarter. Second, the Wal-Mart order came after tests at three facilities that appear to have proved that Plug Power's product makes the grade.

Having the seal of approval from the retail industry's largest player, and most notable cheapskate, is something that retail competitors notice. In fact, if you do the math, Wal-Mart's order doesn't account for the entire backlog increase. A large grocery chain and an auto company also inked deals.

Down and out
This could be the start of something big. That's why the company's shares jumped earlier this year. While they've come down some since then, the big drop at Plug Power happened a decade ago when investors were clearly prematurely excited about the company's long-term potential. With the shares twiddling along in the single digits for years, that potential may now be at hand and on sale.

PLUG Chart

PLUG data by YCharts

Everyone wins
Wal-Mart alone represents a vast opportunity. The company has been looking to both save money and get green, and Plug Power allows it to do both. As an example, a battery-powered forklift needs to be charged overnight, while a forklift using Plug Power's system can be charged in as little as two minutes. Why does this matter? Because employees don't always do what they are supposed to do—which can mean costly delays while waiting for batteries to charge.

Even worse, costly batteries often need to be replaced on a regular basis because of employee negligence (repeated overcharging). A Plug Power unit will last up to a decade. That lets Wal-Mart leverage the cost of its Plug Power units for a very long time. On top of this, don't forget no carbon fuel is being used to power Plug Power's units -- this allowing Wal-Mart to crow about its efforts to get green.

It's no wonder that the giant retailer has expanded this relationship. You should also note that Plug Power is looking to extend its reach from distribution centers and into individual stores, making already-pleased Wal-Mart and its over 4,200 North American stores a very valuable partner. (Don't forget that Wal-Mart has another 6,000 plus stores globally.)

The more units Plug Power sells, the larger its installed base will be and the more service contracts it will have. That's what will provide the base from which this green player can start making a profit. That won't happen this year, but Wal-Mart and an increasing list of large customers suggest that black ink is a lot closer than investors are giving the company credit for after a decade of bleeding red ink.

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Reuben Brewer

Reuben Gregg Brewer believes dividends are a window into a company's soul. He tries to invest in good souls.

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8/27/2015 3:59 PM
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