What happened
Shares of Plug Power (PLUG -0.73%), the fuel cell company that's also building a green hydrogen business to power the fuel cells it sells, saw its stock price drained on Wednesday.
Its shares slid 6.7% through 12:40 p.m. ET after an analyst at investment bank J.P. Morgan cut his price target on the stock by 12.5%, to $28 a share.
So what
That may not sound like such terrible news. Plug Power stock sells for only $16 a share right now, so a move to $28 over the course of the next 12 months would imply a staggering 75% profit for new investors. (And indeed, anticipating this, the analyst rates the stock as overweight.)
But not all of today's news is so good.
The reason the analyst cut his price target is because he says he sees "margin headwinds" for the stock arising from the still-elevated price of natural gas. With much of the fuel used by its fuel cells still coming from natural gas rather than green hydrogen (hydrogen separated out of water atoms through electrolysis, with help from renewable power), high gas prices mean high input costs for Plug Power's fueling and servicing businesses.
Now what
What does this mean in dollars and cents? Until the company starts producing appreciable amounts of green hydrogen (expected to happen toward the end of this year), the analyst is calculating that its gross profit margins will be negative -- at -11.2% in the second quarter and -1.5% for the full year, for example -- despite green hydrogen factories slowly starting to come on line.
The investment bank's prior estimates had forecast Plug earning a 3.3% gross profit margin in Q2 and nearly doubling that margin to 5.7% by year-end. It probably also means that consensus analyst estimates, which see the company losing $0.75 per share this year, are overly optimistic. Instead, Plug may lose far more and miss those estimates.
Highlighting deteriorating margins, and warning of an earnings miss, seem a weak foundation on which to argue that Plug stock is going up 75% -- but maybe that's just me. For now at least, it still adds up to a buy thesis for J.P. Morgan.
