Shares of Plug Power (PLUG -0.40%) have fallen 65% from their highs earlier this year as losses mount for the fuel cell company and investors sell growth stocks in general. The company is still growing and there's a tailwind behind hydrogen fuel as electricity and fossil fuel prices rise, but that hasn't translated to Plug Power's stock price. 

Given the long-term potential for fuel cells, is the decline in shares growing pains for Plug Power or signs of trouble ahead? 

Hydrogen in a bubble.

Image source: Getty Images.

Plug Power's biggest problem

Growth is great, but if a company can't make money on what it sells then the business is doomed. Looking at Plug Power's gross margins, you can see major problems with the business. 

Item Q2 2021 Result Gross Margin
Fuel cell systems and infrastructure $99.3 million 19.5%
Services $5.7 million (172.7%)
Power purchase agreements $8.4 million (165.9%)
Fuel deliveries $11.1 million (262.7%) 

Source: Company earnings report.

Management gave reasons for the weak margins, like high hydrogen costs and one-time switching costs from a vendor. But the sheer size of the negative gross margins has to be a concern. 

This isn't the first time Plug Power has struggled to make money on what it sells. Below is a chart of the company's net income and free cash flow from 2010 to 2020. You can see that the company never made a profit and burned hundreds of millions of dollars in cash over that time. The only way it was able to stay afloat was by selling new shares to investors. 

PLUG Net Income (TTM) Chart

PLUG Net Income (TTM) data by YCharts

Despite the growth, it's hard to see how this time is different. Projects keep getting signed that excite investors, but margins aren't improving and, until the company starts generating cash, it's hard to believe in the company's earnings potential. 

Are electrolyzers a growth story or false hope?

One of the biggest reasons Plug Power's stock did well in 2020 and early 2021 was the hope that hydrogen electrolyzers would be a major growth market over the next decade. Management said that revenue from electrolyzers will grow over 400% this year and grow at "robust" levels through 2024. 

We don't know exactly what the economic terms will be for electrolyzers, but it's a competitive market with companies like Bloom Energy bidding for similar contracts as Plug Power. It's possible this will be another low- or negative margin business for Plug Power, at least for the foreseeable future. 

The best news for Plug Power investors

The good news is that Plug Power's management has used its elevated stock price to sell a tremendous number of shares to raise cash. In fact, between the end of 2020 and June 30, 2021, the company's cash on its balance sheet increased from over $1.8 billion to $3.2 billion. 

This will give Plug Power a long runway to grow, even if growth projects continue to lose money. 

Plug Power has a lot to prove

For more than a decade, Plug Power has been promising to revolutionize the energy market with hydrogen. Fuel cells were first supposed to make their way into cars and trucks, and now the company is pushing green hydrogen as the future. 

In reality, Plug Power is primarily a forklift fuel cell company, which is a steady but hardly revolutionary business. Until the company proves it can move into other markets profitably, rather than using stock sales to fund more money-losing endeavors, this is a stock I would stay far away from.