Hydrogen fuel cells have long captivated the attention of investors and innovators alike. Fuel cells generate power in such a way that water is the only byproduct. No harmful emissions are created if the input hydrogen used to power the fuel cell is produced using renewable energy.
Unfortunately, the commercial success of this technology requires a lot more than being friendly to the environment. It's these headwinds that have some investors and analysts questioning the financial viability of the sector and the companies that are trying to operate there.
Let's discuss five reasons why it may be time to sell the stock of top fuel cell maker Plug Power (PLUG 1.26%).
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1. Hydrogen fuel cells see limited adoption
Growth of fuel cell electric vehicles (FCEVs) has fallen miserably behind battery electric vehicles (BEVs). In 2021, less than 20,000 FCEVs were sold globally. That's paltry, considering that around 6 million electric vehicles were sold globally last year. Advancing both BEVs and FCEVs requires substantial investments in supporting infrastructure. With the growth in BEVs, governments and companies may not have much incentive to develop the infrastructure needed to support FCEV growth. Higher costs and a lack of refueling stations are among the key factors limiting the growth of fuel cell vehicles.
Fuel cells find applications in various other areas, including heavy-duty transport, aviation, shipping, and stationary power. However, the growth here could be much slower than what Plug Power and its investors are hoping for.
2. Plug Power faces intense competition
Even in areas other than light FCEVs, Plug Power faces significant competition. To begin with, several automakers are planning the volume production of electric trucks in the coming months and years. Also, companies including Hyundai and Toyota, which are advancing with fuel cell trucks, are making their own fuel cells.
Plug Power plans to expand into stationary power, but companies such as Bloom Energy (BE 10.99%) already operate in this segment. Bloom Energy's solid oxide fuel cells have certain advantages in stationary power generation, including lower costs compared to the proton exchange membrane cells that Plug Power specializes in.
Overall, Plug Power faces intense competition from diesel-powered trucks and generators and other companies offering fuel cells to customers looking to switch to cleaner energy sources.
3. A long history of losses
In over two decades of operations, Plug Power has never generated an annual profit.
PLUG Revenue (Quarterly) data by YCharts
At the same time, it has been consistently burning cash. More importantly, even as the revenue grows, the losses have widened in recent quarters. Looking at the above chart, it is difficult to see how Plug Power will achieve its target of generating a 17% operating margin by 2025.
4. Broken promises
Plug Power's 2025 operating margin target needs to be taken with a grain of salt. The company has a history of not delivering on its guidance. For example, in 2013, Plug Power claimed that it would achieve earnings before interest, taxes, depreciation, amortization, and stock-based compensation (EBITDAS) breakeven in 2014. It hasn't achieved that even today, over seven years later. In 2016, the company expected to become cash-flow positive for 2017 and beyond. Five years down the line, it is still burning cash.
Plug Power's latest guidance also does not inspire confidence. In June last year, the company's management expected to generate 30% in gross margin by 2024. In October, the company said this target is for 2025. It just moved the goal to 2025 without saying anything about the original 2024 target.
5. A lofty valuation
Plug Power is trying to make fuel cells mainstream, which isn't easy. As a pioneer, it could greatly benefit if it succeeds. However, considering the limited adoption of fuel cells and the intense competition in the segment, its stock still seems to be trading at a considerably high valuation.
PLUG data by YCharts
Even though Plug Power stock is trading more than 70% off its 52-week high price, the stock is still 15 times up from its price three years ago.
It is trading at a high forward price-to-sales (P/S) ratio of more than 13. Though it is not uncommon for high-growth stocks to trade at high P/S ratios, what is concerning about Plug Power is that it does not seem to have any clear path to achieve profitability. If you own Plug Power stock, you might want to hit the sell button in 2022.
