Promise and peril go hand in hand for investors in fuel cell stocks. The energy technology simultaneously represents the future of transportation and embodies the definition of "underdeliver." Yet, despite struggling for decades, the technology and the industry really could be seeing changes as demand for cleaner mobile power grows.

Shares of Plug Power Inc. (NASDAQ:PLUG) certainly acted that way following the release of the company's first-quarter 2018 operating results. Year-over-year revenue growth of 91% is pretty difficult to argue with, and management thinks second-quarter 2018 sales will grow by at least 60% from the prior-year period. All in all, it's shaping up to be a great year for top-line growth.

Is this the beginning of the growth trajectory shareholders have long been waiting for? Could Plug Power be a millionaire maker stock?

A woman checking her phone and cash money falling around her.

Image source: Getty Images.

By the numbers

All four of the company's reportable segments -- fuel cell hardware, fuel cell services, power purchase agreements (PPAs), and fuel deliveries -- grew sales compared to the year-ago period. The biggest increase was derived from selling more devices and hardware. That is important because it grows the installed base of products from which the company can generate long-term maintenance services revenue (which is the most profitable). In other words, it will be the main driver of the business' long-term prospects and financial flexibility.

In the first quarter of 2018, Plug Power reported $6.6 million in fuel cell device sales and $4.9 million from hydrogen infrastructure installations, compared to just $1.8 million and $400,000, respectively, in the year-ago period. Here's how the year-over-year comparison shakes out for other important financial metrics.  

Metric

Q1 2018

Q1 2017

% Change

Total revenue

$29.1 million

$15.2 million

91.4%

Total net revenue (includes warrant exercise)

$27.2 million

$15.2 million

78.9%

Gross profit

($3.98 million)

($4.48 million)

N/A

Operating income

($20.9 million)

($19.6 million)

N/A

Net income

($19.8 million)

($24.0 million)

N/A

Source: Plug Power.

As the table above shows, the business is still losing a ton of money each quarter. That's summarized by the fact that Plug Power reported free cash flow of negative $18.3 million in the most recent three-month period. While that's a major improvement from free cash flow of negative $30 million in the previous year's opening quarter, it's still not creating a sustainable operation capable of funding itself.

Management took the opportunity to complete a $100 million bond issue during the first quarter of 2018. It repurchased older debt, bought back 14 million shares (a total of 36 million shares were issued from 2016 to 2017), and still had $53 million in proceeds left over. That alone won't be enough to shore up the business, but management noted the moves make it easier to secure capital going forward. 

Of course, the best way to stem the cash burn is to grow the level of profitable sales -- which Plug Power is doing right now. The company turned in a positive gross profit on device revenue, and just missed out on posting a positive gross margin for its services and fuel deliveries segments. Even better news: Management expects the upward trajectory to continue throughout 2018.

A man staring at a drawing on the wall showing question marks and leading to a light bulb.

Image source: Getty Images.

Plug Power's powerful outlook

The same growth drivers from previous periods are expected to remain in place for the duration of 2018. For instance, the material handling market, otherwise known as forklifts in warehouses, continues to carry the overall business. That's thanks to major customers Amazon and Walmart, which accounted for 71% of all revenue in 2017. Plug Power expects sales of its fuel cell devices to turn positive this year -- and stay there.

That's not the only driver for the fuel cell stock, however. Management also noted the following for its full-year 2018 outlook: 

  • Plug Power is nearing the launch of its own metal plate stacks (fuel cells are creating by stacking a lot of plates on top of one another), which it claims can decrease stack volume 50%, double power output, and reduce costs by 25%. Those are some bold claims, but if true, then it could allow the business to break out of the warehouse and into other transportation applications, including buses and trucks.
  • The company is actively pursuing a partner to form a joint venture in China, where peer and rival Ballard Power Systems is rapidly scaling up its operations. Plug Power wants to select a JV partner by the end of 2018.
  • The business expects $37 million to $41 million in total revenue in the second quarter of 2018 -- representing year-over-year growth of 60% to 80% -- and a positive adjusted gross margin.

If the company executes on these near-term targets, then investors may expect the share price to increase before the end of the year. (Then again, management has rarely met its guidance in the past.) In the longer term, things get a little more complicated.

That's because Amazon and Walmart each have warrants to purchase over 55 million shares of the company's common stock at prices of $1.19 per share and $2.12 per share, respectively. Having warrants and executing warrants are two different things, and the underlying performance conditions may never be met for either customer to make good on their rights. However, the warrants represent over half of the outstanding shares of Plug Power at prices that peg the company to a market cap under $500 million. 

It's a complex pair of arrangements, but the main takeaway is that they could end up significantly limiting the company's valuation growth in the long term. 

The chemical symbol for hydrogen, "H 2", in grass hovering over a field.

Image source: Getty Images.

Do you want to own a fuel cell stock?

The tide may be turning for Plug Power's business, but it's still a little too early for investors to confidently label the current trajectory as the long-awaited growth path. I would still want to see the business deliver improvements to gross margin, operating margin, and cash flow before feeling comfortable even entertaining the idea of owning the fuel cell stock for the long haul. And that's before veering off into the weeds represented by the stock warrant agreements with Amazon and Walmart, which could significantly limit share price growth. (Unless the two duke it out for ownership, but that's another topic altogether...)

There's real progress being made at Plug Power -- and I say that as a general skeptic of the technology -- but even if the stock delivers healthy gains in the coming years, the odds are against this being a millionaire maker stock.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.