The concept of a fuel cell has been around for a long time, but the companies making the technology haven't exactly lived up to expectations. In fact, Plug Power (NASDAQ:PLUG), a public company since late 1999, has a history of making promises and failing to deliver. That said, Plug Power's stock has roughly doubled so far in 2019. Having IPOed in mid-2018, Bloom Energy (NYSE:BE) doesn't have as long of a public market track record yet, but it has to contend with the same history of missed expectations. Bloom is up just 10% or so this year. However, it is down 25% from its IPO price, and a whopping 65% or so from the highs reached shortly after it went public.
1. Sizing the businesses up
Plug Power has a market cap of around $600 million. Bloom's market cap is $1.2 billion, despite it being public for only about a year (and the fact that its shares have fallen by 25% since its IPO). However, when you look at each company's revenue it makes sense that Bloom would have the larger market cap -- the company generated roughly $200 million in revenue in the first quarter, compared to Plug Power's roughly $20 million.
To be fair, the quarterly revenue numbers are for just three months, and Plug Power's revenue can jump around a bit, with the first quarter historically being a weak period of the year. But the comparison doesn't change materially when looking back over a longer period. Bloom's trailing 12-month revenue is roughly $775 million, while Plug Power's was only $172 million. Despite its short stint on the public markets, Bloom Energy has a more substantial business.
2. Any profits here?
That said, neither company has been able to turn that revenue into bottom line profit. Bloom Energy lost $0.76 a share in the first quarter, while Plug Power's red ink came in at $0.15 a share. Neither company is generating positive free cash flow either. Although the notion of fuel cells is exciting, Bloom Energy and Plug Power have yet to find a way to turn their technologies into a profitable business.
One notable factor here is the substantial investments in research and development that both companies are making. R&D spending ate up nearly 20% of Plug Power's revenue in 2018, with Bloom spending about 12% of its top line on such investments. Because the technology underpinning these businesses is relatively new, neither can really afford to stop such investments -- that spending is basically table stakes. That means that high costs are likely the norm for a while.
3. How they pay the bills
With red ink flowing and the material costs of playing in a high-tech space, both companies need to find a way to fund their businesses. At the moment, they're mostly filling that void by tapping the capital markets -- the debt-to-capital ratio is over 100% at both companies. That's a notable level of leverage.
While there's nothing inherently wrong with a company using leverage, the interest expenses related to significant debt simply create an even greater headwind to profitability. Essentially, buying Plug Power or Bloom Energy stock is a bet that the future will look brighter than the present, and that all of the spending to get there will pan out as planned.
4. The target markets
Both companies have impressive lists of customers, including companies like Amazon and WalMart. However, what they do differs materially. Plug Power has staked out a material position in transportation, providing fuel cells for everything from forklifts used inside warehouse facilities to delivery trucks and consumer vehicles. The technology has caught on more widely in some applications than others. Batteries, for example, are currently more popular than fuel cells when it comes to cars and trucks. So while Plug Power's addressable market appears to be huge, realistically it faces notable competition from other technology options.
Bloom Energy's focus is on providing reliable power to large facilities. Its fuel cells can complement intermittent power options (like solar and wind), provide backup power in emergency situations, and offset grid usage during peak load times to help reduce electricity costs. Although Bloom needs to convince customers of the value its product offers, it isn't really trying to revolutionize anything. It's more akin to displacing a dedicated backup generator. That's a material market, but one that's likely to face less competition from other emerging technologies.
Which of the long-term opportunities is more compelling will likely depend on the investor looking at these two stocks. However, what is clear is that both companies are working to create large installed customer bases. If a large enough customer base is created, then the ongoing fees these two fuel cell makers generate will, eventually, provide a foundation for future growth. That, however, will only happen after the businesses gain enough scale to become profitable.
5. A better business?
Stepping back from the big picture here, it's interesting to note that Plug Power's gross profit margin has generally peaked in the low- to mid-single digits. That's not a great result, especially when you compare it to Bloom Energy's gross profit margins, which are in the 10% range. It appears that putting in a smaller number of large fuel cells is working out better than trying to get a large number of small fuel cells into the transportation mix.
6. Valuation, for what it's worth
Without earnings investors can't rely on a price-to-earnings ratio, which is usually the first tool pulled from the valuation tool box. With negative free cash flow, price to cash flow isn't a useful metric. And with both companies reporting negative shareholder equity in the most recent quarter, price to book value isn't particularly meaningful either. That leaves price to sales as the core valuation tool here.
On that score, Bloom Energy's P/S ratio of 1.1 is much lower than Plug Power's nearly 3.4. To be fair, Plug Power's P/S ratio is much lower than it was five years ago, when it was in the mid to high teens. But that doesn't change the fact that investors are affording it a premium over Bloom Energy today.
A final call
Plug Power and Bloom Energy are two money-losing companies that are attempting to introduce new technologies to the world. All but the most aggressive investors would be best off avoiding both until they have proven that their businesses can be sustainably profitable.
However, for more aggressive types who believe fuel cells will play a big role in the future of power consumption, it appears that Bloom Energy has the edge here if you had to pick one name from this pair. It has a more substantial business backed by materially higher gross margins and is trading at a lower valuation. Just make sure to watch the balance sheet and the company's progress getting customers to adopt its fuel cell technology. Trouble on either of those fronts could quickly derail this risky investment.