Plug Power (PLUG -1.66%) is a rapidly growing hydrogen fuel cell company that's also burning through its cash reserves at a rapid pace. While the future of fuel cells looks bright, and Plug Power is a solid leader in its chosen field, investors should fasten their seat belts because the road ahead is full of potholes.
Money matters
In the first quarter of 2023, Plug Power reported revenue of $210 million, up 49% year over year. However, the company's cost of revenue -- another name for the more commonly seen cost of goods sold (COGS) -- is a substantial portion of its expenses.
Actually, that expense is larger than the incoming revenue. COGS was $350.4 million, resulting in a gross loss of $69.4 million.
On top of that, operating expenses increased 35% to $140 million. As a result, the company posted a net loss of $207 million. Selling, general, and administrative expenses accounted for $104 million of those costs, leaving just $26.5 million to spend on research and development.
Looking for a green financial lifeline
Plug Power is a risky investment due to its high cash burn rate. In the first quarter of 2023, the company consumed $277 million of cash from operations. That's more than the $207 million in net losses after tax, and far above the $210 million of top-line revenue. I generally don't mind fast-growing businesses running at a loss for a while, prioritizing top-line growth over immediate profits, but this negative balance is extreme.
With that steep quarterly cash burn and just $475 million of cash on the balance sheet, Plug Power must soon make a difficult choice. Its cash cushion is running out of the green stuff and will soon need either a fresh cash infusion or a much lower burn rate. In other words, the company could be forced to ease the accelerator pedal back from the metal and accept slower sales growth unless it can finance its daily operations from other sources.
So Plug Power is currently evaluating several forms of low-cost and nondilutive capital as it continues to build out a global green hydrogen generation network. Plug Power is also completing the second stage of due diligence with the Department of Energy's Loan Program Office and evaluating asset-backed loan facilities from major banks.
These are great projects, pointing to a strong financial future -- but that's not the whole story. The company's promising green hydrogen project pipeline tells a robust long-term growth story, but the company needs to set up a stronger balance sheet and a credible path to profitability. Until that happens, Plug Power's investors should worry about the company's financial future.
Heaps of hydrogen hurdles
It's not easy to wrap your head around the magnitude of Plug Power's lack of profits. The infographic you saw earlier offers a visual explanation, but let me put it into words again.
The company's cost of goods sold amounts to 133% of the incoming revenue. That's all of it, and then 33% more. I'm sure you've seen net losses before, and operating losses may be painful but aren't unheard of. In this case, Plug Power runs its business at a gross loss, both literally and figuratively. In fact, the ink is only getting redder over time. A year ago, the total cost of revenue only exceeded top-line sales by 25%.
Plug Power needs to find a concrete way to lower these costs in order to improve its profitability. The rich list of future and ongoing hydrogen production installations and fuel cell factories looks great on paper, but only as long as management can keep the lights on until the theoretical opportunity can deliver real-world results and revenue.
Guidance targets suggest that the gross losses could turn into gross profits in the current fiscal year. That's a positive development, but simply stating that goal is not the same as actually achieving it. And even then, the cash burn seems likely to continue as Plug Power's operating costs (mainly in the selling, general, and administrative bucket) take away another $140 million per quarter.
So Plug Power's revenue growth is impressive, and I get that the company is building a fuel cell infrastructure essentially from scratch. That's an expensive and difficult project, aiming at a lofty and worthwhile goal. If all goes well, Plug Power's faithful shareholders could see fantastic returns on their early investments.
But the company's large losses and high cash burn rate make me wonder whether that ideal outcome is in the cards, and I'm not sure this promise is worth so many sleepless nights in the meantime.
Investors should approach Plug Power cautiously until it can set up a credible path to profitability.
