While electrification gets a lot of headlines, energy investors shouldn't overlook hydrogen as a potential growth area in the decarbonization economy. It's easily stored and transported, and it's combustible. That offers a lot of advantages over solar and wind power, which are only present intermittently and subject to expensive battery storage.
Plug Power (PLUG +0.00%) has invested aggressively to become a leader in the burgeoning hydrogen economy. However, the company has gotten over its skis, taking on massive losses as it builds out its infrastructure, while diluting shareholders to raise cash for the effort.
But with its stock down more than 99% from all-time highs and now just trading around just 60% of book value, is the stock worth a look? There were, after all, some improvements in its recent quarter naysayers shouldn't overlook.
NASDAQ: PLUG
Key Data Points
Plug's recent results look mighty ugly
Plug has a somewhat complicated business, but it boils down to the production of hydrogen, the delivery of hydrogen to enterprise customers, and the sale of hydrogen equipment, either for stationary power or hydrogen fuel cell forklifts. The company has also built its own hydrogen production facilities in Tennessee and Georgia, with another plant built in a joint venture in Louisiana.
Building all of these manufacturing businesses takes a lot of time and money, and Plug is still inking large losses. Management had expected more hydrogen adoption by now. But high interest rates and delays in the disbursement of government incentives have slowed things down for Plug's customers.
As a result, Plug's revenue declined 45% last quarter, while the company's operating losses expanded from ($233.8 million) to ($244.7 million).
But gross margins are improving under the hood
However, there were actually some positives for Plug when one looks under the hood. Basically, all of last quarter's decline was due to lower equipment sales to outside customers. But management also noted on the conference call with analysts that a $70 million order couldn't be recognized in the quarter, even though Plug already received the cash.
That caused equipment sale revenue, which makes up over half of revenue, to plunge and look quite ugly, bringing overall results down with it.
However, Plug's other segments, including services Plug performs on fuel cell vehicles and power equipment, power purchase agreements for turnkey services, and hydrogen fuel delivery all incrementally improved margins. This came from raising prices to customers and delivering more volumes over fixed infrastructure.
|
Segment |
Q2 2023 Gross Margin |
Q2 2024 Gross Margin |
|---|---|---|
|
Equipment Sales |
13.4% |
(69.2%) |
|
Services |
(169.5%) |
(5.3%) |
|
Power Purchase Agreements |
(234.6%) |
(176.1%) |
|
Fuel Delivered to Customers |
(260.5%) |
(95.1%) |
|
Other |
(44.1%) |
53.3% |
Data source: Plug Power quarterly report.
Make no mistake, these aren't good numbers taken in isolation. But if one looks beyond the equipment sales loss, which could be somewhat attributed to revenue recognition, gross margins improved across all of Plug's other segments, as these segments' revenues grew.
And there could be more cost cuts coming down the pike. Plug announced the hiring of Dean Fullerton as its new chief operating officer in late July. Fullerton comes from Amazon, where he was vice president of Global Engineering and Security Services. Of note, Amazon is a big Plug customer.
Fullerton joined management on the recent conference call, noting several areas where he believes he can take costs out of the business. As we all know, Amazon is a master at lowering its costs to serve customers, so there could be even more future savings as Plug grows revenue going forward.
Image source: Getty Images.
But Plug is too risky to invest in right now
It should be noted that even with these improvements, Plug still burned through about $616 million in the first half of 2024 alone. While the company also has nearly $1 billion on its balance sheet, much of that is restricted, so there are limits to how much it can use and for what purpose.
Therefore, Plug only has enough cash on hand for about another year, even if the company continues to improve margins and gets access to all its cash. Furthermore, that improvement depends on the continued adoption of hydrogen as a new power source. While that should happen over time, it's highly uncertain that hydrogen adoption will continue on Plug's projected timeline.
So, the stock is pretty much uninvestible at the moment. But uninvestible doesn't mean Plug can't be on one's stock watchlist.
Should the company's improvements continue, and should hydrogen adoption accelerate in the near-term, perhaps as interest rates come down, Plug could make for an interesting turnaround story. Still, it's best for investors to wait for evidence of the company getting to true bottom-line profitability before jumping in.
