There's a push for corporations to lower their carbon footprints, and hydrogen is a clean fuel source because it only produces water as a byproduct. Plug Power (PLUG -0.77%) has spent years billing itself as the leading hydrogen fueling company.
But today, the stock hovers near its 52-week lows. The company's new large hydrogen facility is ramping up, a considerable development. Should investors buy Plug Power for its long-term potential with hydrogen fuel cells?
Here is what you need to know.
Facility completion will save Plug Power a lot of money
Plug Power's long-awaited production facility came online in January. It's capable of producing 15 tons per day of green hydrogen by the second quarter of this year. That brings companywide production to an estimated 40 tons by year-end. This is a big deal because Plug Power had been buying and reselling hydrogen to its customers, an arrangement with terrible economics. CFO Paul Middleton stated that Plug Power bought fuel for $12 to $14 per kilogram last year and sold it for between $6 and $7. Texas and New York facilities will eventually come online and further boost production capacity.
Plug Power estimates that, by producing its fuel, its costs will drop to between $3 and $5 per kilogram. That's a monumental shift in the business model and its costs. How bad was it in 2023? Plug Power's revenue from selling fuel was $66 million versus a cost of $246 million, an egregious $180 million loss right off the jump.
But is it enough?
Plug Power needs more financial help than producing its own hydrogen. It's still unclear how viable a business Plug Power can be without destroying shareholder value to stay afloat. For example, free cash flow is negative and is heading in the wrong direction faster than revenue is growing.
PLUG Free Cash Flow data by YCharts
The company's revenue grew 27% year over year in 2023, but the cost of goods sold increased 56%. That doesn't include operating expenses like sales and marketing, research and development, or administrative costs. Those nearly doubled, rising 72% from 2022 levels.
PLUG Cash and Short Term Investments (Quarterly) data by YCharts
Management has emphasized that it will dramatically scale back spending and raise prices this year to help curb losses. Smaller losses are great, but will aggressive price increases hurt growth efforts? It's unclear how much pricing power Plug Power has. I'm skeptical of how much the company can reduce its cash burn without trading off revenue growth. Plug Power must prove its pricing power this year.
Either way, the company is already destroying shareholder value. Over the past three years, Plug Power has rapidly depleted billions in cash from its balance sheet. The result is aggressive share issuances to raise new funds. The share count has more than tripled since 2022, meaning existing shares represent a smaller piece of Plug Power's eventual profits.
Plug Power falls into the "too hard" pile
Plug Power undoubtedly has a challenging task: Growing an expensive business model and establishing a new market for its products simultaneously. Progress is being made as more facilities come online. However, there is a difference between business success and a successful investment. Plug Power doesn't look close to profitability, and the expected continued share issuances to raise money will likely eat away at the stock's long-term investment potential.
As if that weren't bad enough, it's still unclear how big a role hydrogen will play in the world's long-term energy picture. If hydrogen usage takes off, will Plug Power endure competition from deep-pocketed energy giants that can spend their way into the arena? Hydrogen could ultimately be a commodity business.
Plug Power has many question marks, and it's unclear how long it will take to get answers. It's not worth facing your investment's dilution while waiting to find out. Consider looking elsewhere for energy opportunities.
