Why Is Plug Power Stock Going Down?

Plug Power (NASDAQ:PLUG) attracted a lot of attention for its ProGen engines, which can operate for up to 30,000 hours without much degradation.

But the stock has been plagued by poor performance this year with the share price falling by 46% year-to-date, and tumbling 15% at the start of October alone. 

What’s causing the stock to head south in such a hurry?

Analyst Downgrades Spark Selloff

Plug wasn’t the only stock to take a tumble in early October. It was joined by other hydrogen-related stocks, including Bloom Energy (NYSE:BE) and Nikola (NASDAQ:NKLA).

All three took a nosedive following an analyst downgrade which saw the company’s price target slashed to just $8 per share.

While the downgrade triggered a short-term selloff, the top line numbers under the hood have been nothing short of spectacular.

Last quarter, Plug Power reported year-over-year revenue growth of 72%, which followed growth of 49.3%, 36.3% and 31.1% in the three quarters prior.

At first glance, it’s hard to discern where the skepticism lies and why the bears are gaining traction but when we look further down the profit and loss statement, the issue becomes clear, operating income is negative.

Not only did Plug Power reported operating income of -$208 million in the most recent quarter but when we examined the prior 12 quarters, every single one had negative EBIT.

Naturally, we kept going further back in time, and discovered that, in every single quarter for the past 5 years, Plug Power has reported negative operating income. That’s the kind of operational inefficiency that eventually Wall Street punishes, and it has.

Will Plug Power Go Out of Business?

The front and center reason for investor concerns is that all those losses have impacted the balance sheet severely.

To highlight the urgency of the situation management faces, look no further than the balance sheet health in the first quarter of Q1 versus today.

Back then, the company had $4.3 billion in cash and cash equivalents, in addition to $405 million in short-term investments. Total debt stood at $668 million.

Fast forward to the most recent quarter and the cash pile has been largely burned with just $579 million, though short-term investments is up marginally to $505 million. Debt, on the other hand, has climbed to just shy of $1 billion. The company reported $970 million in the Q2 2023 quarter.

Cash crumbling and debt rising while operating income continues in the red is the type of ingredient mix that investors will only tolerate for so long, and for Plug Power there doesn’t appear to be any runway left to convince investors to hang on.

So, is there any hope for Plug Power shareholders?

5 Reasons Bulls Can Cling To

While the financial picture is, no doubt, dire for Plug investors, all hope is not lost. For one, the company has material agreements with the likes of SK Group and Renault to further its technology aims. The SK Group deal, in particular, offers Plug a gateway to the Asian markets and was accompanied by a $1.6 billion investment.

It also has extraordinary revenue growth over the past 10 quarters, implying that its combination of fuel cells, as well as hydrogen generation and distribution have been a hit with customers.

The third reason to be optimistic stems from management’s expansion initiatives. Keep in mind that the negative operating income is, in part, a function of management’s aims to expand the firm’s geographic reach.

The firm is broadening its horizons by aggressively targeting the European market, forecast to hit $42 billion by 2030, that is widely viewed as more receptive to its technology. 

Another reason bulls cite for sticking with the firm is its technology advances, specifically related to next-generation liquid hydrogen systems that are designed to improve energy density by as much as 35% and pave the way for more cost-effective products.

Lastly, while the company is eating into its cash pile with each passing quarter, it still does have almost a billion dollars in liquidity. That may be enough for the company to turn the profitability corner in time before a secondary offering is needed to shore up cash reserves.

Plug Power’s Balancing Act

Bears have been on the attack over the past year driving Plug Power’s share price sharply lower, and not without good cause. The company has been burning its cash pile for the past 3 years to the point where its debt and cash reserves are about equal.

There is a very real concern now that the company will run out of cash before it can become profitable. Certainly, the runway has shortened considerably for management to flip the firm’s operating income from red to black, though investors aren’t waiting around to see if such a feat can be performed. Instead, they have already run for the exits.

For the loyal shareholders who are hanging on the key areas of focus are operating income, liquidity, and debt. The first variable impacts the latter two, and needs to turn positive very soon, otherwise existing shareholders are likely to be diluted through a secondary share offering.

Against the negative backdrop, bulls can cling onto a very significant north star, which is rapidly growing revenues. If revenue growth can be sustained at its current pace there is good reason to believe that the bottom line challenges will be overcome, and they in turn will resolve the balance sheet woes.

This isn’t a stock for the conservative investor, however. Even the most hardened speculator will need to run the gauntlet if they hold onto Plug Power shares. Whether the company can survive and thrive is more a dice roll than a sure thing. It could happen, but it seems risky to bet on a positive outcome, and analysts seem to have reached that conclusion too.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.