Expectations are high for Plug Power Inc (NASDAQ:PLUG) in the second half of 2017 -- its performance could determine whether the company grows or flounders in the future. Orders from Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) are both expected to pick up, potentially allowing the company to be profitable in the second half of the year. 

After years of disappointing results and financial losses, Plug Power's management has to hit expectations to keep the market's trust. Here's what to look for as the third quarter earnings release approaches. 

Outline of a battery in leaves with hydrogen symbols on the floor.

Image source: Getty Images.

Plug Power's high bar for itself

The first thing we should measure Plug Power against is its own guidance. Below I've laid out the first half performance along with guidance and the implied second-half performance the company has to hit to meet its own guidance. 

  1H 2017 2017 Full-Year Guidance Implied 2H 2017
Revenue $36.0 million $130 million $94.0 million
Adjusted Gross Margin ($8.0 million)


$10.4 million-$15.6 million

$18.4 million-$23.6 million
Free Cash Flow ($75.4 million) ($25 million-$35 million) $40.4 million-$50.4 million

Source: Plug Power earnings release.

You can see that performance has to improve dramatically compared to the first half of the year to meet expectations. Amazon is expected to account for $70 million of revenue in 2017, nearly all of which will be in the second half, and that's why guidance is so high. But execution on fulfilling orders profitably will be key. 

History says investors should be cautious

It's been more than three years since Plug Power signed its first deal with Walmart, sending Plug Power's stock into the stratosphere. But since that initial excitement performance hasn't been all that promising. Revenue is up, but management has never met its own profitability targets. First, they said operations would be near EBITDA breakeven by the end of 2015, only to report negative $35 million in EBITDA for the year. Then breakeven EBITDA was pushed out to the end of 2016, but the reality was a $37 million EBITDA loss. Management has a history of coming up way short of their own expectations, so why bet this time is different? 

To make matters worse for shareholders, as Plug Power has continued to report net losses, it has turned to selling shares of stock to fund its expansion and serve Walmart and Amazon. You can see below the massive dilution that's taken place over the past decade. 

PLUG Revenue (TTM) Chart

PLUG Revenue (TTM) data by YCharts

The hope is that the second half of 2017 will turn that trend around, as you can see by the tremendous free cash flow expected by management, and cash is needed to keep the business afloat. At the end of the second quarter, Plug Power had just $2.1 million in unrestricted cash and just $16.9 million of cash in total. It simply can't keep up the cash burn rate of the first half of the year with so little cash on the balance sheet. 

Even if Plug Power does reach positive cash flow and earnings, investors don't own nearly as much of the upside as the did a few years ago. Shares outstanding have jumped 480% in the last five years alone, and Walmart and Amazon were given over 110 million warrants to buy shares in the future. Those warrants were the cost of securing huge new orders, but they'll be costly for investors. 

Lots riding on the second half of 2017

The biggest reason investors are high on Plug Power today is the massive upside potential from the Walmart and Amazon orders. But if those orders don't result in improved gross margins and cash flows, they won't improve the company's finances long-term. The third quarter is when management expects financial conditions to turn around, and there's a lot riding on Plug Power living up to its own expectations. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.