So, you saw new solar panels on your neighbor's roof, and another electric vehicle (EV) passed you on the road today, and now you're thinking it's time to consider an alternative energy investment. However, you're a savvy investor, and you're considering a less obvious angle: fuel-cell stocks.
Having performed some initial research, you find that Plug Power (PLUG -5.47%) is one of the industry's leaders and has appeared in the headlines over the past year after striking a deal with Amazon.com. But before you get too energized about opening a position, take a breath, and strongly consider watching this stock from the sidelines.
A tale of two trajectories
Fuel cell solutions may not be a common daily sight, but don't let that fool you. Plug Power has excelled at convincing customers that its hydrogen-powered solutions are viable alternatives to traditional power sources. Illustrating this fact, the company has excelled at growing its top line thanks in large part to numerous orders from Walmart and the deal with Amazon.com, which it inked last year.
Plug Power's accomplishment is even more noteworthy when considering the company's fuel-cell peers: Ballard Power Systems (BLDP -2.28%) and FuelCell Energy.
But the company has struggled to achieve the same impressive growth in profitability. In fact, a red-hued bottom line has been an ongoing sight on the company's income statement. Whereas Ballard Power Systems has reported a gross profit in each of the past 10 years -- steadily expanding it from 15% in 2014 to 34% in 2017, according to Morningstar -- Plug Power has failed to report a gross profit in all but one of the past 10 years; it booked $4 million in gross profit in 2016.
For Plug Power, economies of scale have remained consistently elusive. Consequently, it's wise for investors to be circumspect about expecting the company to consistently turn a gross profit anytime soon -- let alone the ability to consistently generate positive net income.
No easy road ahead
Unlike its competitors, Plug Power has primarily brought its fuel-cell expertise to the material handling market. But that's not to say the company is intent on solely remaining focused on powering forklifts and the like. In its most recent letter to shareholders, for example, management specified that "powering commercial electric fleet vehicles is a viable near-term opportunity."
Investors, however, should take this comment with a grain of salt. Although Plug Power has reported success in on-road demonstrations of its solutions with FedEx, plenty of threats to the company's success in this endeavor lurk on the horizon. United Parcel Service, for example, is testing Ballard's fuel-cell module in its delivery vans; moreover, it announced in late February its intent to "deploy 50 plug-in electric delivery trucks that will be comparable in acquisition cost to conventional-fueled trucks without any subsidies." And, of course, one would be remiss to not acknowledge the electric-powered elephant in the room, Tesla, which has signed deals with both FedEx and UPS for its semi trucks.
Plug Power's management has also demonstrated interest in bringing its fuel-cell solutions for EVs to China, which has expressed strong interest in adopting fuel-cell technology for the automotive market. Again, though, investors should exercise caution. Although plenty of American companies have found success in China, a looming trade war -- or even the mere threat of one -- may impede the momentum Plug Power has recently built in the country.
Checking the price tag
Currently, Plug Power's stock trades for 3.96 times trailing sales, representing a discount to its five-year average of 5.98, according to Morningstar. Although the price tag on Plug Power's stock is down about 20% year to date, it's light-years from a screaming buy. In fact, it's not even a loudly voiced buy. Shares would have to fall significantly before I'd be willing to take on the hefty risk associated with this hydrogen-hopeful. Ballard seems like a more intriguing opportunity even though it's trading at 5.16 times trailing earnings -- richer than its five-year average of 4.53 and Plug Power's current valuation of 3.96.
It's easy to be swept up in the fervor of a new technologies. But it's incumbent upon those who find themselves swimming in the ocean of enthusiasm for renewable energy to slow down and recognize the considerable risks that could sink their investments.
Of course, those investors who are most risk-tolerant may very well consider picking up a few shares of Plug Power, but there are plenty of more compelling opportunities that warrant consideration for larger positions. Although I'm rooting for fuel-cell companies to surmount the challenges that lay before them, I'll be watching this narrative play out from the sidelines.