Plug Power (PLUG 1.26%) has been one of the most hyped hydrogen stocks. The stock shot up to dizzying heights in early 2021 after the company bagged some big contracts and, later in the year, set out 2025 goals of $3 billion in revenue and an operating margin of 17%. But it has struggled to execute.
Don't get me wrong: Except for 2021, Plug Power's revenue has risen steadily in recent years. The question is: Will it ever make a profit?
With the company manufacturing fuel cells for more than a couple of decades now, investors have waited far too long to see it convert that incremental revenue into profits. Unfortunately, that's where Plug Power has failed again and again, with its latest quarterly numbers, released yesterday, serving as another stark reminder. Take a look.
Image source: The Motley Fool.
As you can see, the bulk of Plug Power's revenue comes from the sale of fuel cell systems, equipment, and related infrastructure. These include GenDrive fuel cells, GenSure stationary backup power units, electrolyzers, hydrogen fueling infrastructure, and other equipment like liquefiers and cryogenic storage equipment. Sales from these shot up 86% year over year in the second quarter, driven primarily by new hydrogen-installation sites and strong demand for GenDrives and cryogenic storage equipment.
Overall, Plug Power's revenue jumped 72% year over year in the second quarter to a record high. The company expects the trend to continue and is particularly optimistic about its electrolyzer and cryogenics businesses.
Plug Power has a problem
In electrolyzers, Plug Power recently bagged a contract in Europe, which it claims to be the largest-ever green hydrogen project in the history of Europe's oil and gas sector. The company now says it is in the "final stages" of closing some other big deals.
Meanwhile, it expects strong revenue and margin growth for liquefiers and cryogenics in the second half of 2023 and is pursuing opportunities that could bring in $1.5 billion in bookings in the medium term.
With these businesses gaining traction even as Plug Power strives to bring its hydrogen plants on line, the company is confident of generating $1.2 billion to $1.4 billion in revenue this year. That will mean a solid 85% growth in revenue at the midpoint over 2022.
Yet, despite torrid revenue growth year after year, Plug Power's losses are rising instead of falling.
PLUG revenue (TTM) data by YCharts. TTM = trailing 12 months.
Plug Power's gross margin slumped to a negative 30% in the second quarter, and it was much worse than its year-ago negative gross margin of 21%. Its net loss widened 36% year over year to $236 million.
Cash burn remains a big concern. In the six months ended June 30, Plug Power used up $625 million cash for operating activities against a net loss of $443 million. So even though Plug Power may want investors to believe that it has ample liquidity in the form of cash and cash equivalents and marketable securities, it'll still never be enough if the company continues to burn cash so rapidly.
In fact, Plug Power is already looking for more money and is exploring options like the Department of Energy's loan programs, as well as corporate debt and investment partners to raise funds. While it's good to know that the company doesn't intend to sell shares to raise capital, debt will mean additional cash outgo in the form of interest payments.
Management, though, has a plan up its sleeve to improve margins. And if it's to be believed, things could start to turn around in the second half of 2023.
What to do with Plug Power stock now
During the earnings call, management said it's not giving any estimate on gross margin for 2023, but it at least acknowledged that gross margin has been a challenge for the company.
However, it does expect "tremendous sequential progress" in margins in the second half of the year as it brings green hydrogen plants on line. Producing internally could cut Plug Power's green hydrogen costs by one-third versus what it's paying now to buy fuel from the market, and that should boost its margins, so much so that management even expects to have a positive gross margin by the fourth quarter.
Let's cut to the chase: Plug Power's revenue growth isn't a problem, but margins are. While it's hard to trust management's projections just yet, you should want to wait at least another quarter instead of panic-selling now, since any improvement in margins could propel the stock higher.
Just be cautious and don't buy more on the dip, because when all is said and done, Plug Power remains a risky bet.
