Though batteries are often seen as competing with hydrogen fuel cells, the two technologies are in fact complementary, and each has a role to play in reducing global emissions. Plug Power (PLUG 0.40%) is a leading company in the promising hydrogen fuel cell space. Obviously, it comes as a top choice for investors looking to bet on hydrogen's growth.
However, after two decades of operations, Plug Power is still posting losses. With strong revenue growth in recent years, can the company finally turn profitable?
The bull case: Top stock to bet on hydrogen fuel cells
Neha Chamaria: The hydrogen fuel cell industry is nascent, and companies operating in it are still trying to establish the financial viability of the fuel-cell technology. That also means while fuel cell companies have a huge addressable market to tap, investing in them comes with its fair share of risks.
That's pretty much the case with Plug Power, but it's still one of the top stocks in the industry to bet on if you're bullish about the prospects of hydrogen's use in fuel cells to generate clean energy. For that matter, industry experts peg the global hydrogen fuel cell industry to grow by double-digit compound annual rates in the coming years.
Plug Power is a first mover in the industry, having delivered its first fuel cell product in 1999. The company has grown manifold since, establishing a leadership position in the material handling equipment market (primarily manufacturing fuel cell engines to power forklifts) and growing its revenue more than tenfold.
The biggest challenge for Plug Power right now, though, is converting that expertise and experience into real profits; and while the company is yet to turn a profit, a couple of things could help it get there. To start, Plug Power is expanding into higher-potential markets like commercial vehicles, stationary power, and aerospace, and has signed multiple deals lately to that effect. By 2025, Plug Power expects to generate $3 billion in revenue and an operating margin of 17% or more.
Also, Plug Power has something rivals don't: cash. As of Sept. 30, 2021, Plug Power had nearly $3.4 billion in cash and cash equivalents versus long-term debt worth around $1.2 billion. With its top line also growing steadily, Plug Power stock looks compelling, especially now that it's plummeted nearly 65% from its early 2021 highs.
The bear case: Competing technologies may severely restrict growth
Rekha Khandelwal: One of the top reasons behind the immense interest in Plug Power stock is the enormous potential for fuel cells in electric vehicles. However, that story doesn't seem to be panning out as investors were hoping. Growth of fuel cell electric vehicles (FCEVs) has been well behind that of battery electric vehicles (BEVs). In 2021, fewer than 20,000 FCEVs were sold globally. In contrast, around 6 million electric vehicle units were sold during the same timeframe. With the growth in battery vehicles, the hydrogen refueling infrastructure isn't attracting much investment, which may further restrict the growth of FCEVs.
Notably, fuel cells could be the better option than batteries in heavy-duty transport, aviation, shipping, and stationary power. These could potentially be lucrative segments for Plug Power. Right now, Plug Power's main market is the material handling segment. The likely reason behind Plug's incessant losses in this segment is that its fuel cell-powered forklifts aren't competitive in terms of costs compared to other available options in the market, including traditional sources like diesel or gas.
In its stationary and backup power segments, Plug Power faces competition from Bloom Energy, whose solid-oxide fuel cells could be more cost-competitive than Plug's proton-exchange membrane fuel cells. Similarly, in transport applications, Plug Power faces competition from automakers such as Hyundai Motor and Toyota, which are also making fuel cells.
So, while light passenger vehicles are gravitating toward batteries instead of fuel cells, competition in other segments where fuel cells find applications is intense. In short, Plug Power's path toward profitability is long and hazy at best.
This fuel cell stock looks risky
How Plug Power performs in the newer segments it is targeting remains to be seen. The issue is this long wait might not be worth it considering the company's past performance, an unclear growth path, and competition. Plug Power stock looks like an extremely risky bet, and you may not lose much by avoiding it altogether.