In the last year, Plug Power (NASDAQ:PLUG) stock has risen 1,330%. In the same timeframe, peer Ballard Power's (NASDAQ:BLDP) stock rose "just" 217%. Enthusiasm for renewable energy in general, and hydrogen in particular, has sent the shares of the two companies soaring. But is there more room for these stocks to run? And is one of the two fuel cell companies a better buy than the other? Let's find out.
Plug Power is growing revenue faster
Both Plug Power and Ballard Power offer proton exchange membrane (PEM) fuel cells -- the most common fuel cell technology in use right now. These generate electricity taking a fuel, such as hydrogen, as input. Fuel cells have applications in the materials handling market (in forklifts), heavy duty vehicles, such as buses and trucks, and passenger cars. These are also used in stationary power generation. Though a majority of hydrogen is currently derived from natural gas, hydrogen fuel cells are promoted for their potential as a clean fuel, where hydrogen is derived from water through electrolysis.
While both Plug Power and Ballard Power have been growing their revenue steadily, Plug Power's growth has been faster. Until now, Plug Power's key market has been forklifts. The company has acquired prominent customers, including Amazon and Home Depot, which helped boost its sales in the last few years.
As the above graph shows, Plug Power managed to grow its revenue at a faster pace than Ballard Power in roughly the last five years.
While both companies are expanding across segments and geographies, Plug Power has recently entered into partnership with French automaker Renault. European carmakers are Plug Power's key target group, considering the push for hydrogen in Europe.
By comparison, Ballard Power has made headway in China. It has formed a joint venture with Weichai Power -- a leading manufacturer of engines and auto parts in China. Weichai has acquired a nearly 20% stake in Ballard Power. The joint venture intends to build around 2,000 fuel cell modules by 2021.
Ambitious growth plans
Both Plug Power and Ballard Power have laid out ambitious plans to grow their revenue and operating income. Plug Power expects to grow its annual revenue from an expected $327 million in 2020 to $1.7 billion in 2024 -- a compound annual growth rate of 50%. Looking at its five-year average revenue growth rate of around 35%, that looks a bit ambitious. The company also plans to generate $200 million in operating income by 2024. This looks quite unrealistic.
As the above graph shows, Plug Power hasn't been able to generate positive operating income in more than 20 years of operation. In its plan for 2024, Plug Power expects significant growth in revenue from new markets, such as electric vehicles, as well as from the green hydrogen market through its electrolyzer sales. However, though lower in percentage terms, material handling represents the most growth in absolute dollar amount. This business contributed around 94% of Plug Power's 2020 revenue, amounting to $292 million. The company expects material handling to contribute roughly $750 million to its total revenue in 2024.
Notably, Plug Power hasn't been profitable in this segment over the last several years. The company hopes to achieve positive operating income by a combination of increased scale and reduced costs -- a dynamic that has been at play throughout all these years. Despite significant reductions in costs -- the costs of its key material handling product GenDrive has reduced to less than half in 10 years -- Plug Power hasn't become profitable so far. It may achieve operating profitability by 2024, but I don't see any new catalyst to help it do so. The electric vehicle and electrolyzer markets could be different, but they are not going to contribute enough by 2024 to make a major difference in Plug Power's profits.
Ballard Power's plans look loftier than Plug Power's. The company hopes to achieve annual revenue of $5.2 billion by 2030. That's a CAGR of 46% from its 2020 expected revenue of $115 million. Over the last five years, Ballard Power grew its revenue at an average rate of around 21%.
Similarly, the company's expectations of 20% margin for its earnings before interest and taxes aren't supported by a concrete plan. And we have not even reached the bottom-line profits yet. Factor in the interest costs as well as the effects of dilution, and the story seems fanciful.
All in all, both Plug Power's and Ballard Power's plans look too ambitious. What's more, the current valuations of the stocks are pricing in even higher growth than these plans suggest.
The better buy is...
Based on recent revenue growth and plans, Plug Power looks better than Ballard Power. However, both stocks face key risks, especially relating to the growth of hydrogen as a fuel. The growth of battery-powered vehicles may limit adoption of hydrogen fuel cells in mobility applications. Moreover, the companies' growth plans make a lot of optimistic assumptions, which may not materialize. Not only do these stocks entail significant risks, but they also are trading at enormous valuations. Renewable energy investors can find better options elsewhere.