Plug Power (NASDAQ:PLUG) has seen its share of ups and downs lately, through little fault of its own. Recent increases in market capitalization can be most likely attributed to increasing fourth quarter revenue and decreasing annual adjusted net losses year over year, combined with announcements of new contracts to provide and service GenDrive units.

Drops in Plug Power's market valuation have most recently been attributed to analyst downgrades that cite the eventual removal of subsidies and the company's inability to live up to its own guidance as reasons to avoid buying. Orders will come and go, guidance can be hit or miss, and earnings will see quarterly and annual fluctuations, but if Plug Power is to become a successful fuel cell company, one uncompromising condition of its long-term success will be its ability to make a profit without the assistance of government subsidies.

Past and future orders
Revenue for Plug Power is nearly entirely dependent on product and service sales, with research and development contracts contributing a nearly negligible amount of the $8 million in fourth quarter revenue. This fact alone is the likely culprit in explaining why investors have jumped on-board the Plug Power train in response to announcements of contracts with Wal-Mart (NYSE:WMT) and other major materials handling companies. The dependence of Plug Power on yet-to-be-established new sales to finally turn a profit is also the major obstacle that investors need to watch when determining if the potential upside in fuel cells is worth the risk of Plug Power never becoming profitable.

Plug Power is the clearly dominant (almost exclusive) supplier of fuel cells for materials handling applications, having over 4,500 GenDrive fuel cell units deployed throughout the United States. The most recently established contract to provide another 1,500 GenDrive units shows there is growth to be realized in the industry, and only one servicing company currently able to meet the demand. With every order comes the establishment of the fueling infrastructure and future servicing that provides Plug Power with recurring revenue. As the number of deployed units grows annually, the portion of the company's revenue derived from the on-going servicing of the units will grow as well, hopefully easing some of the burden of generating new sales.

A bunch of 'ifs'
The idea behind why Plug Power could become a great and profitable company is simple at its core: Plug Power continues to receive more and more orders for fuel cell units, and the market for fuel cells in materials handling applications is large enough to allow for immense growth of the industry's dominant supplier. The components that go into the core idea behind Plug Power's success are unfortunately not as straightforward.

One of the big questions posed by Citron Research moving forward for Plug Power is the impact of subsidies on the number of orders coming in. According to the Department of Energy (DOE), the vast majority of currently deployed fuel cell units across the country were purchased without DOE subsidies. While recent purchase agreements from some large corporations may be motivated in part by cost-sharing as part of Section 1063 of the Recovery Act, the prominence of unsubsidized fuel cells currently deployed suggest that Plug Power's existing clients, as well as other major materials handling companies, will continue to transition away from lead-acid batteries and toward hydrogen fuel cells.

An equally big 'what if' to consider when debating how the end of subsidies may impact sales for Plug Power is the possibility of extending or reworking incentive programs for fuel cell installations beyond the 2016 deadline highlighted by Citron Research. While I wouldn't recommend making investment decisions based on the prospect of government support for renewable energy technologies, I would equally caution against making investment decisions based solely on analyst recommendations.

The takeaway
Perhaps the biggest challenge for Plug Power moving forward will be to generate enough revenue and decrease operating costs enough to make a profit, with or without the assistance of government subsidies. As the only fuel cell company servicing the multi-billion dollar materials handling industry, the biggest obstacle for Plug Power won't be competitors or government programs or even a lack of demand for their products, it will be its own ability to control costs and prove that its business model is financially sustainable.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.