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Shares of Plug Power (NASDAQ:PLUG) have popped and dropped so many times this year, it's not hard to imagine investors not even blinking an eye when shares move by as much as 10%. However, when Plug Power announced earnings, shares plummeted enough that it should grab just about everyone's attention. Let's take a look at what happened this quarter, and why this particular quarter was enough to send shares plunging 15% since the opening bell. 

Let's face it, this was coming

Sometimes, when a company's shares have skyrocketed as much as Plug Power's have in recent months, all it takes is a less-than-stellar quarter for shares to crash hard. This quarter was a perfect example of that. After reporting that revenue for the quarter came in at $19.2 million and net losses ended up at ($0.06) per share--short of Wall Street's expectations of $24.4 million in revenue and a net per share loss of ($0.05)--shares of Plug dropped close to 15%.

Quite possibly the only thing higher than investors' optimism for Plug Power has been the valuation of its stock. Even after today's big pull-back, shares are still trading at a frothy total enterprise value to revenue ratio of 13.4 for the last 12 months. It's certainly a much more modest valuation that what it carried several months ago when shares were trading at over 30 times revenue, but it's still quite high for even the most promising company. So it wouldn't be surprising if the company were to see another big price drop if there were more bad news down the road.

Broken promises

When a young company like Plug Power is going through growing pains, investors need to be very patient. There are going to be lots of revenue and earnings misses (if you really care about those sorts of things), operational issues, and all the other headaches that come with bringing a new, innovative product into the market. One thing that is hard to get over, though, is when management makes promises that it can't seem to keep. 

This year was supposed to be the banner year for Plug Power, according to management. While this year has been the best it's ever seen, the actual results still fall well short of what management has said it would do. In several press statements and business updates at the end of last year and the beginning of this one, CEO Andy Marsh said he expected three things to happen in 2014:

  • Annual revenue would reach $70 million
  • Total order bookings would be in excess of  $150 million
  • The company's product sales would break even on an EBITDAS basis in either the 2nd or 3rd quarter.

Plug Ebitda Breakeven Scenario

Source: Plug Power Investor Presentation, December 2013

So far, annual revenue stands at $42 million and total booked orders have totaled $102 million. While it isn't impossible for the company to reach its sales and order goals, it would take a gargantuan effort throughout the rest of the year to make it happen. It's even more upsetting considering that even on last quarter's conference call, Mr. Marsh said that total bookings by the end of this quarter would be in the $115-$120 million range.

In the case of EBITDAS, though, not only has the company not reached break-even yet, but this past quarter we actually saw EBITDAS loss increase to (42%) from (28%) in the second quarter. Much of that can be attributed to ramping up the sales force and high costs for its service revenue, but the harder pill to swallow is that the company has really struggled to bring down material costs enough on the product side of the business. 

Very rarely is guidance at a company ever right, but many investors got caught up in the siren call that these management targets suggested. It's commendable that the management team at Plug Power is very optimistic about the outlook for the company, but it's starting to look more like they are throwing out overly ambitious goals rather than trying to make accurate statements about the future of the company. It makes it that much harder for an investor to hang on to an investment that may take years to pay off when these sorts of things happen.

What a Fool Believes

It's way too early to completely write off what Plug Power is doing to develop and commercialize the hydrogen fuel cell, but it's worth being a little more critical about its prospects of becoming a profitable company. It won't take too long for investors to catch on to management crying wolf about its prospects and start to become wary of any promises that management makes. 

Overall, there are still lots of unanswered questions when it comes to investing in Plug Power. Can it maintain this sales momentum? Can it start to either bring down costs or increase prices to become profitable? Does it have enough of an inside track in the fuel cell business that it can't be disrupted by a competitor? When you add these questions to a management team that is becoming harder and harder to take at their word, it doesn't make for the most compelling investment case out there today.

Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool. 

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