Plug Power (PLUG 12.38%) has been through its share of boom and bust cycles over the past two decades. Hydrogen has long been seen as a valuable fuel source, once for cars, then for trucks, and now for energy storage. But it's never quite lived up to expectations of being a great growth stock.
That may be changing now that wind and solar energy are cheap enough to start thinking about using "green hydrogen" made from renewable energy, rather than "gray hydrogen" that's derived from natural gas. But before getting too excited, there are some realities investors should keep in mind with this company, and they may be a reason the stock is down 62.9% from its 52-week high.
Financials are a mess
The truth right now is we don't know what Plug Power's financials really look like. Management said earlier this year that it needs to restate at least four years of earnings after irregularities were found. That's never good news for a company, but especially a company that wasn't profitable or EBITDA positive before the restatements.
We don't know exactly what the impact of the restatements will be, and that's exactly the problem. There are huge uncertainties as we look forward, and I find it at least troublesome that these irregularities were found just days after SK Group made a $1.6 billion capital investment in the company.
What we know about Plug Power
There are a few warnings investors should keep in mind when looking at the hype behind Plug Power:
- Plug Power has never been profitable.
- Management funds losses with dilutive share sales over and over again, leaving existing shareholders with a shrinking portion of the company's future earnings.
- The company has a long history of falling short of guidance. I go through some of that history here, but we can go back to 2013 when management said the company will be EBITDA breakeven by mid-2014. It's 2021 and the company hasn't reported positive EBITDA.
At the very least, I would be skeptical that Plug Power will live up to the new lofty expectations investors are putting on the stock, given the sharp rise in the stock price over the past year.
Electrolysis is new to Plug Power
The biggest opportunity for hydrogen in the future is powering what's known as the "hydrogen economy," which involves generating clean energy with wind and solar power plants and storing excess power in hydrogen through a process called electrolysis. This could allow "green hydrogen" to power Northern homes through the winter or provide Southern air conditioning when it's cloudy and not windy. It could truly be a revolution in energy, and Plug Power is leaning into that. But it's brand new to the electrolysis business.
Plug Power acquired Giner ELX for a mere $52.9 million in June 2020 to get into the electrolyzer business. Projecting billions of dollars in electrolyzer sales in the future is great, but if the foundational technology comes from a company that was acquired just last year for a small sum, you have to wonder how defensible the position is in the market and how valuable these electrolyzers are, given that Giner ELX accepted just $52.9 million in a buyout when it must have seen the same multibillion-dollar market on the horizon.
Competitors including Bloom Energy (BE 6.51%) are also beginning to test and build electrolyzers on an industrial scale, but that's using a solid oxide electrolyte rather than a polymer electrolyte membrane that Plug Power uses. This process should allow for lower cost and higher efficiency for electrolyzers and the ability to have a fuel cell and electrolyzer in one by running the system forward or backward.
The point here is that electrolyzers could be an enormous business a decade from now. But there's no guarantee that Plug Power will be one of the winners, and it's a relative newbie after a fairly small acquisition in 2020.
Plug Power's hype has gone too far again
Plug Power has been a hype stock for most of the past decade, but it's never quite lived up to the hype. I'm afraid that's going to happen again, with the company hyping "green hydrogen" as its future. The company may prove me wrong, but investors should tread lightly, because this is a company that's failed to live up to expectations for a long time.