When discussing alternative power, investors don't just get charged up about solar and wind power; fuel cells often power their conversations, too. And when speaking of fuel cells, Plug Power (PLUG -3.83%) is one of the most recognizable names. The company is a leader in the hydrogen fuel-cell market, but that alone doesn't make it a wise investment. Let's comb through the company's recent 10-K to examine some of the challenges management recognizes as threats to the company's success.

Hitting a wall

From the 10-K: "We depend on a concentration of anchor customers for the majority of our revenues and the loss of any one or more of these customers, or a significant loss, reduction, or rescheduling of orders from any of these customers, would have a material adverse effect on our business, financial condition, results of operations, and cash flows."

Ideally, a company's revenue growth would stem from an increasingly diverse customer base. It's more precarious when a company relies heavily on only a few customers, since if one of those customers is lost, the company could suffer greatly. Herein lies the risk with Plug Power.

On one hand, the company deserves recognition for what it's accomplished -- revenue growth of 323% from 2013 to 2015. However, the sales growth doesn't correlate with greater customer diversity. Wal-Mart accounted for the majority -- 56.7% -- of the company's total consolidated revenue in 2015, which is not an auspicious sign. In fact, it's moving in the wrong direction: In 2014, two customers -- Wal-Mart and Volkswagen -- accounted for 37.2% of the company's total consolidated revenue.

Depending on Wal-Mart for growth is tenuous at best. Facing increasing competition from online retailers, ithas grown revenue by only8% over the past five years and has reported a 15% decline in capex spending over the same period, according to Morningstar, suggesting that reinvesting in the company -- as in transitioning its material handling equipment to a fuel-cell infrastructure -- may not be at the top of its priorities list.

Forever in the red

Again from the 10-K: "We have incurred losses, anticipate continuing to incur losses, and might never achieve or maintain profitability."

Attempting to bring alternative power to the mainstream is no easy task, so an investment in the company demands patience. Early investors know this well. Since its IPO in 1999, the company has never reported a quarterly profit.

PLUG Net Income (Annual) Chart

PLUG Net Income (Annual) data by YCharts.

Management noted that from 1997 to 2008 it was primarily focused on the research and development of fuel-cell systems, then began to focus on the commercialization of its products toward the end of 2008. All of this helps to put its lack of profitability in perspective, and it's possible that a glimmer of profits is appearing on the horizon.

Management contends that since it launched its turnkey concept, GenKey, in 2014, it has been on the straight-and-narrow path to profitability. The company forecast achieving positive EBITDA by Q4 2016 during an investor presentation in January. Take it with a few grains of salt, though.

Back in 2014, fellow Fool Tyler Crowe, with a hint of skepticism, noted CEO Andy Marsh's comments from 2013. On a business update call, Marsh suggested that Plug Power would break even on an EBITDA basis by the second or third quarter of 2014. He was a little off. According to Morningstar, the company reported an EBITDA loss of $84 million in 2014. Bad news followed in 2015 -- the company reported an EBITDA loss of $52 million.

Should management actually meet its guidance this time around, it remains unclear when it will actually translate to actual earnings per share. In essence, a healthy dose of skepticism is again well warranted. It's clearly in the realm of possibility that profitability evades the company for several more years -- possibly indefinitely.


Once more from the 10-K: "Our products and services face intense competition and we may be unable to compete successfully."

Not only is Plug Power attempting to transform people's perceptions about material handling equipment, but it's also trying to do so while holding competitors -- present and potential -- at bay.

The company doesn't face formidable competition from other companies that provide fuel-cell solutions to the material handling market. In fact, Ballard Power Systems, which supplies the fuel cells for Plug Power's GenDrive systems, recognizes that "Plug Power is the only company currently offering a full suite of class 1, 2, and 3 forklift solutions to the material handling market."

However, management recognizes that both traditional and alternative-energy companies represent competition -- companies that include "major electric, oil, chemical, natural gas, battery, generator, and specialized electronics firms." But it doesn't stop there. Plug Power also identifies universities, research institutions, and foreign government-sponsored companies as competitive forces.

Management specifies that larger companies working with incumbent technologies represent potential competition. For example, Johnson Controls, an industry leader in the battery market, could be a company on Plug Power's radar. Though it doesn't currently supply batteries to the material handling market, that's not to say it's averse to entering it, since the company is keen on growing its power-solutions business. And rumors surfaced at the end of of 2015 that Johnson Controls was in talks to acquire EnerSys, a company that does supply lead-acid batteries to the material handling market. 

The takeaway

As an early leader in the fuel-cell market, Plug Power certainly deserves examination. But one must look carefully -- the risks are plentiful. In the future, investors can see if management meets its forecast and reports EBITDA above breakeven by the end of 2016. Digging even further, investors can keep an eye on the company's customers, looking to see if Wal-Mart accounts for a decreasing portion of Plug Power's revenue.