Plug Power Stock: Why We’re Not Buying It
Investing in a stock without knowing what the company does is a mistake made by newbies and experienced investors alike. Whether you’re investing in stories or chasing performance, it’s important to look under the hood of every stock you invest in to understand the risks involved. Stocks that are constantly being hyped by the Reddit types should be examined with even more scrutiny. One stock that’s been pumped for over two decades now is Plug Power Inc (PLUG). Check out this excerpt from a piece by Fortune titled, “Meet The New Market Makers They’re young, they’re rich, and they couldn’t care less about Graham & Dodd. But they’re the ones driving those insane tech stocks, and they’re not going away.”
“What the heck is this company?” I ask. “It’s PLUG,” Mesh says. Yeah, I know that much. But what does it do? “I don’t know,” Mesh responds, without looking up. “Power, I guess.” I decide to let the issue drop, and with PLUG now about to close at $79, the question of what the company does seems pretty irrelevant.Credit: Fortune
Astute fuel cell investors will be quick to point out that during the hydrogen hype saga of early 2021, Plug only traded up to $70.51 a share, and they’d be right. The excerpt above was taken from an article by Fortune published over 20 years ago, right before the dot-bomb era imploded. At that time, Plug stock traded at the split-adjusted price of $1,500 a share. After a reverse split, and several decades of spinning wheels, Plug’s hydrogen economy promises are finally starting to show some green shoots of growth in the form of revenues.
Let’s start with the obvious question. How is it possible for a company to have negative revenues?
Plug Power’s Negative Revenues
In 2017, Plug Power signed an agreement with Amazon that went something like this. If Amazon spent $600 million on fuel cell products and services, Plug Power would let them buy 55,286,696 discounted shares (also called warrants) that – at that time – would have amounted to 23% of the company. We say “at that time” because, like many other companies we look at, Plug has been issuing shares left and right to grow their operation.
Giving away equity in a company to fuel growth is what startups often do, but it isn’t typical for a public company to nearly triple shares outstanding in just three years’ time. Retail investors, many who are responsible for the volatility on display, rarely consider the effects of dilution, instead choosing to focus on the price per share. But that’s a whole different discussion, so let’s get back to talking about Amazon.
(Editor’s note: To any CFAs reading this, we’re calling warrants “discounted shares” to keep things simple for people who didn’t spend three years of their evenings studying to take extremely difficult tests like you did. Thank you for your understanding.)
Amazon and Plug Power Inc
The agreement with Amazon stipulated that $600 million would need to be spent before the discounted shares (warrants) would be made available in a vesting schedule that looked like this.
- Tranche One: 5,819,652 vested upon execution of warrant
- Tranche Two: 29,098,260 vests in four installments, each vesting when $50 million is spent
- Tranche Three: 20,368,784 vests in eight installments, each vesting when $50 million is spent
Aside from Tranche One which was meant to cover expenses incurred during the deal, the remainder of the discounted shares were to be vested once $600 million had been spent. So, how much money has Amazon spent with Plug Power?
That’s a tough question to answer because Plug Power doesn’t provide us with sufficient details regarding customer concentration risk. Using various statements made within their past 10-K annual reports, we were able to piece together some revenue granularity as follows.
We don’t know why Plug Power stopped providing customer concentration numbers for Amazon and Walmart in 2019, but they’re doing investors no favors. We can reverse-engineer the most recent negative revenue numbers and assume that Amazon’s revenues for 2020 were $89.6 million. But even if Amazon spent $100 million with Plug Power in 2019, they still haven’t even spent half of the planned $600 million. So why did Plug Power waive the remaining vesting conditions under the Amazon Warrant in December 2020?
On December 31, 2020, the Company waived the remaining vesting conditions under the Amazon Warrant, which resulted in the immediate vesting of all the third tranche of the Amazon Warrant Shares and recognition of an additional $399.7 million reduction to revenue.Credit: Plug Power
Plug Power says this was “recorded as a reduction of revenue, because they represent consideration payable to a customer.” The CEO of Plug Power told the Wall Street Journal that “It was an extraordinary payday for them.” That’s great that Plug Power wants to do favors for their biggest customer, but this is precisely why we see customer concentration risk as a big red flag. As for Amazon owning some meaningful percentage of Plug Power, an article by The Fool talks about how Amazon appears to have sold their position and profited handsomely from the deal. Plug Power also has a nearly identical arrangement with Walmart which was entered into just months after Amazon’s in 2017, so perhaps a similar event could take place down the road when Walmart demands equal treatment.
With that whole negative revenue problem behind them (maybe), Plug Power is now experiencing the revenue growth they’ve been promising investors for decades. Here are Plug Power’s historical revenues with the 2020 negative adjustment to revenues removed.
Is this finally the start of “the hydrogen economy,” something we’ve been hearing about for decades now?
The Hydrogen Economy
Wall Street analysts are more than capable of explaining the bull thesis which can easily be understood by retail investors who peruse Plug Power’s latest investment deck. The company wants to expand the use cases for hydrogen fuel cells outside of just electric material handling vehicles like forklifts and onto industrial trucks. They’re now building their own plants to produce green hydrogen, a decision likely prompted by reliability problems they’re experiencing such as “force majeure events primarily related to hydrogen plant shutdowns.” Hydrogen fuel sales accounted for just 8% of Q3-2021 revenues, but that number will grow as they deploy more hydrogen infrastructure.
But just because some Morgan Stanley analyst says hydrogen fuel cell systems are a strong buy, and sets a $65 price target on Plug Power, doesn’t mean you should invest in Plug stock. Anyone who works in finance knows that investment banking analysts lost their credibility a long time ago. You’ll hear cheerleaders say you need to climb on board because the next Tesla train is about to take off – choo choo! It’s these same people who create the volatility that assures those on the sidelines that future buying opportunities will always be popping up.
After plummeting -68% from their peak in January 2021, shares of Plug Power aren’t excessively overvalued based on our simple valuation ratio (we won’t invest in anything over 40).
- Market capitalization / annualized revenues
13,000 / 576 = 23
Plug Power now needs to prove they’re able to build their business while trying to appease the BSDs who have all the power at the negotiating table – Amazon and Walmart. We need to see that customer concentration risk decreases meaningfully before we take another look at a company that’s finally starting to show meaningful traction in the form of revenues.
Plug Power’s decision to waive Amazon’s remaining vesting conditions doesn’t seem right, no matter how management wants to spin it. Essentially, shareholders are subsidizing the world’s biggest company, and having their equity stake diluted while doing so. How long before Walmart demands the same treatment?
Plug Power – along with all hydrogen fuel cell stocks – has been subjected to hype for the past two decades. Throw in the extreme customer concentration risk, along with 500-lb gorillas like Walmart and Amazon that call the shots, and there’s just too much risk associated with an investment in Plug Power. Perhaps once that customer concentration risk has been reduced – presuming they start making these critically important numbers available to investors – the company may merit another look.
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