In the recent past, Plug Power (NASDAQ:PLUG) has seen significant volatility. After touching a 52-week high of $6.05 in the third week of February, PLUG stock declined by 54% to $2.76.
This decline was triggered by the company’s 40 million share offering at $2.75. Subsequently, the stock has moved higher by 46% and currently trades at $4.03. The sharp rally after the equity dilution has been due to the company’s optimistic growth target. While the management sounds bullish, I remain skeptical.
Before I discuss my views, I want to talk about a December 2019 report on PLUG stock by Spruce Point Capital Management. The report has an ultra-bearish view on the stock with management credibility, capital structure deteriorating and lack of institutional investors’ interest being key negatives.
I do agree with the concerns and I see PLUG stock as a good trading stock than a portfolio stock.
Management Target Seems Unrealistic
For the fiscal year ended 2019, Plug Power reported total revenue of $230.2 million. Further, for the current year, the management believes that revenue is likely to be higher by 25% at $300 million.
The key concern is the company’s guidance of $1.0 billion in revenue by FY2024. From $300 million in the current year, revenue growth has to be at a CAGR of 35.1% to achieve the target.
Achieving this target seems difficult considering the following factors –
The company’s total backlog as of FY2019 looks robust at $797.4 million, but the backlog will be executed over a period of 90 days to 10 years. Clearly, the backlog needs to be ramped-up significantly if the revenue target has to be met.
In the last financial year, PlugPower witnessed backlog growth of $257.4 million (net of order executions). This is not enough to convince the markets on potential revenue of $1 billion in the next five years.
It’s worth noting that for FY2018, Plug Power reported restricted cash of $71.6 million. Over the next 12 months, the restricted cash swelled to $230.0 million. The reason is vendor financing.
For the last year, Plug Power reported revenue of $230.2 million and restricted cash increased by $158.5 million. Therefore, there is a significant dependence on vendor financing driven revenue growth. This is not sustainable in the long-term. It remains to be seen how the company can drive growth without the dependence on vendor financing.
The scalability of the company’s business model is still doubtful. The key reason is that hydrogen fuel cells are expensive. An adoption, similarly to electric cars, is only possible if the cost declines and the fuel cell infrastructure is ramped-up.
Leverage and Equity Dilution
Towards the end of FY2019, Plug Power offered 40 million shares at a price of $2.75. This translated into total secondary offering proceeds of $110 million.
Besides the equity dilution, in the last financial year, the company’s total debt and finance obligations was $377.4 million. On a year-on-year basis, the total debt financial liabilities increased by $242.4 million.
The point I am making here is that there is an increase in sources of funding, but that has not translated into strong growth. Further, factors like vendor financing to trigger revenue growth is concerning.
I want to add that the company also has $110 million in convertible senior notes in the balance sheet as of FY2019. This implies further dilution of equity in the coming years.
To add to the worries, Plug Power reported cash used in operations of $51.5 million for the last year. The company’s cash flow from operations has consistently been negative with no guidance on the time-line for positive cash flows. As cash burn continues PLUG stock is unattractive.
My Concluding Views on PLUG Stock
Considering the volatility in PLUG stock in the last few months, traders can consider exposure for short-term gains. However, there are too many uncertainties to consider the stock for the portfolio.
In particular, the company’s growth target seems unrealistic and there are significant credit metrics worsening. Moreover, the prospect of further equity dilution due to sustained cash burn is also likely to keep investors away from PLUG stock.
With uncertain economic conditions due to the COVID-19 pandemic, it makes sense to be invested in stocks with strong fundamentals. From this perspective as well, PLUG stock can be avoided.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.