Shares of hydrogen fuel cell (HFC) maker Plug Power (NASDAQ:PLUG) were red hot in 2019. PLUG stock rose more than 150% throughout the year, as investors celebrated the company’s ability to drive enormous sales growth through higher HFC uptake in the materials handling industry (think HFC forklifts).
More than that, investors celebrated management’s bullish outlook to essentially grow billings by five-fold over the next five years, and generate a sizable $170 million in operating income by 2024 (versus wide operating losses today).
Here’s the thing. If management can deliver on those goals (or anything close to those goals, for that matter), then Plug Power’s growth trajectory will remain robust for a lot longer, and PLUG stock will continue to rally in a big way.
But, if management doesn’t come close to delivering on those goals, then the Plug Power growth narrative will fall flat over the next few years, and so will PLUG stock.
So, what’s going to happen?
I think management will deliver. Not because they have a history of delivering (they don’t). Nor because they have history of strong execution (they don’t). Rather, because it makes logical sense for HFC forklift adoption rates to significantly rise over the next few years. As they do, Plug Power — the leader in the HFC forklift world — will see its sales, margins and profits dramatically improve.
Big gains in Plug Power stock will follow suit.
Why Plug Power Could Sustain Big Growth
Plug Power pundits will point out (and correctly so) that management has a history of over-promising and under-delivering, and that failed execution has resulted in tremendous shareholder dilution over the past several years. So, they think the aggressive 2024 guide calling for $1 billion in bookings and $170 million in operating profit is just a pie-in-the-sky over-promise.
But, that analysis misses the point, and the point is that Plug Power finally has a clear and promising growth trajectory for its HFC technology in the materials handling industry.
There are about 6 million forklifts in the world. For sustainability reasons, operators of those forklifts are feeling tremendous pressure to use alternative fuel forklifts with reduced emissions. Naturally, one would assume that batteries could do the job here, just as they’ve done the job in the passenger car market. But, battery forklifts have significant short-comings, including:
- Long charging times (they take about 15 minutes to charge).
- Significant free space requirements (you need a ton of space dedicated toward battery storage and recharging).
- Loss of power (as batteries drain, operation power weakens).
- Short life cycles (the batteries need to be replaced every few years).
Insert HFC forklifts. They address these shortcomings in one broad sweep. Long charging times are reduced to 2 minutes. You don’t need any space for battery storage. They always run at constant power. And they often last longer than a few years.
Given these inherent advantages, why wouldn’t big forklift operators start pivoting to HFC forklifts?
They will. Today, Plug Power counts multiple Fortune 500 companies as customers. But, most of those customers have only placed small orders for “testing” purposes. Over the next few years, we will move from the “testing” phase to the “full deployment” stage. Plug Power’s dozen small contracts with big companies, will turn into big contracts with big companies, and revenues, margins and profits will soar higher.
PLUG Stock May Stay Hot
So long as the Plug Power growth narrative remains robust, Plug Power stock should stay hot.
That’s because PLUG stock is dirt cheap relative to the company’s long-term potential.
There are about 6 million forklifts deployed in the world, and about 1.5 million bought every year. To-date, Plug Power has only shipped about 28,000 fuel cells. Meanwhile, the total materials handling market measures about $30 billion. Plug Power is due to report only $235 million in billings this year.
In other words, Plug Power today is a fraction of what Plug Power could be tomorrow. The valuation on PLUG stock represents this. Plug Power’s market cap is just a shade over $1 billion.
Thus, if Plug Power does sustain big growth in the $30 billion materials handling industry, PLUG stock will keep soaring.
I think that will happen, given escalating pressures on corporations to cut down on their carbon emissions as well as rising popularity of HFC forklifts based on their workload optimization advantages. Assuming it does happen, and Plug Power hits its five-year financial targets, then my modeling suggests that Plug Power could hit 50 cents in earnings per share by 2025.
Based on a market-average 16-times forward earnings multiple, that equates to a 2023 price target for PLUG stock of $8. Discounted back by 10% per year, that implies a 2020 price target of about $6 — which is more than 50% above where shares trade hands today.
Bottom Line on PLUG Stock
Plug Power stock is a high-risk, high-reward play on continued robust uptake of HFC forklifts in the materials handling industry. I think that will happen, given mounting sociopolitical pressures on corporations to reduce carbon emissions as well as growing cost and productivity advantages associated with HFC forklifts relative to other alt fuel forklifts.
If it does happen, then PLUG stock will keep soaring.
As of this writing, Luke Lango was long PLUG.