Fuel cell manufacturer Plug Power (NASDAQ:PLUG) has done relatively little since going public all the way back in 1999. Then again, maybe it's all about timing.

The global focus in recent years on alternative energy and the electrification of transportation could mean the fuel cell pioneer's long wait to achieve market traction could soon be over. And in fact, a substantial increase in the installed base of the company's products in 2017 could suggest just that. The problem is that the business has historically struggled to post profits, and Plug Power stock has been a downright awful investment.

Are there any indications that the company is headed in the right direction? Would that make Plug Power stock a buy?

A hand on a calculator as someone does financial analysis at their desk.

Image source: Getty Images.

By the numbers

While the business today is focused on material handling markets -- otherwise known as powering forklifts in warehouses -- in 2017 nearly 72% of all sales were derived from Amazon and Walmart. That's both encouraging and terrifying.

On the one hand, it's important for small and innovative companies to score big wins from deep-pocketed customers and partners to prove their technologies. On the other hand, these relationships are hardly equal. Deep-pocketed companies often have the financial flexibility to test out unproven and unprofitable technologies, sometimes for years, only to walk away at a moment's notice.

Plug Power needs to diversify its customer base to mitigate that risk. That's especially true considering the company is building an entire technology ecosystem from which it can extract value. It offers a range of products and services, including its GenDrive fuel cell systems for forklifts, GenFuel fuel delivery service, GenCare maintenance services, and four other offerings. So after selling a device to a customer, the company can generate recurring revenue from maintenance and fueling for years to come.

In the long run, the business model should help to smooth out year-to-year fluctuations in GenDrive deliveries, since the installed base will keeping increasing. That's the idea, anyway. In reality, although revenue from services, Power Purchase Agreements (PPAs), and fuel deliveries has increased each year from 2013 to 2017, none of these services has generated a profit. Ever.

Metric

2017

2016

% Change

Total net revenue

$103.2 million

$85.9 million

20.1%

Gross profit

($28.1 million)

$3.9 million

N/A

Net income

($127.1 million)

($57.9 million)

N/A

Average shares outstanding

216 million

180 million

19.7%

Source: SEC filings.

Judging by the numbers reported in SEC filings, Plug Power doesn't appear to be capturing any gross margin benefits from the larger scale of its PPAs or fuel delivery service. There does appear to be a benefit for maintenance services, however. These arrangements posted a loss of just $0.8 million in 2017, compared to a loss of $8.9 million in 2015.

Investors that look a little deeper will see why that's the case. Consider the growth in device and contract count over the last three years:

Metric

2017

2016

2015

GenDrive devices sold during year

3,293

1,383

3,634

GenDrive devices under maintenance contracts

11,296

8,950

8,655

Hydrogen installations under maintenance contracts

40

30

23

Sites under PPAs

33

25

14

Source: SEC filings.

As you can see, the number of GenDrive devices sold each year can be a little volatile. But the important number is how many GenDrive devices are already out in the wild. In fact, Plug Power appears poised to generate profitable sales from its maintenance contracts in 2018 or shortly thereafter. Could that make up for losses elsewhere?

Well, it doesn't look promising as the company is currently constructed. Plug Power lost $14 million on just $38 million in revenue from PPAs and fuel deliveries in 2017. The PPAs, in which the company sells equipment to customers and then leases it back, seem to be the problem: These arrangements alone lost over $10 million last year. Worse, there doesn't appear to be any material benefit for the company in entering into these agreements. It's a pretty big head scratcher.

In fact, it makes things pretty simple for individual investors. So long as Plug Power retains this part of its business, the fuel cell stock probably will not be worth a spot in your portfolio. Plus, there are other considerations that lie outside of the financial statements.

An illustrative fuel cell setup in the lab.

Image source: Getty Images.

Minor technical details

Fuel cells tend to capture the imagination of investors. There's good reason for that -- on paper, anyway. But those with an understanding of the technical details know that translating that potential into real-world success will be a little more complicated, especially if the goal is to enable profitable operations. 

For instance, current fuels cells may work well enough to power forklifts and other small vehicles, but they are an imperfect power source for commercial vehicles, despite Plug Power's wishes to supply them to FedEx. Scaling up fuel cell systems requires stacking many small cell plates. This creates a myriad of issues such as fragility, heat dissipation, and chemical byproduct removal. Then there are the problems with needing to use expensive catalysts that limit a hydrogen fuel cell's use beyond specialty applications. Chances are with larger scale applications, fuel cells are going to lose out to better batteries (whether lithium-ion, solid state, or another type) than overcome their inherent limitations.

A forklift in a warehouse.

Image source: Getty Images.

Pass on this fuel cell stock

Plug Power is finding success growing the total number of installed devices in the hands of its customers. That will make maintenance contracts more lucrative -- and profitable -- over time, which is a key part of the current business model.

That said, the business model could use a lot of simplification. There doesn't appear to be a path to profitable operations for the company's PPA and fuel delivery segments. Management has rarely delivered on its lofty promises over the year. And the fact that nearly 72% of the company's business comes from just two customers shouldn't be overlooked by investors, as it presents a significant risk.

Long story short, an investment in Plug Power requires investors to have a lot of faith in the underlying technology, but science doesn't work on faith. The perception of fuel cell technologies simply doesn't match up with the market and technical realities dictating their success. Investors should pass on this fuel cell stock.