Can Plug Power Finally Establish a Viable Business?

The nice thing about checking in with a stock once a year is that you’ll have completely forgotten what conclusions you arrived at last time. It’s like you’re looking at the stock for the very first time, and fresh eyes always uncover new things to like or dislike. Today, we’re going to start by completely ignoring our past research piece on Plug Power Stock: Why We’re Not Buying It and pretending like it’s the first time we’re coming across the stock, one that remains extremely popular amongst the retail investor community.

Before we start digging into Plug’ Power’s most recent 10-Q, let’s address the green elephant in the room. Our recent piece titled Is the Green Hydrogen Economy a Pipe Dream? looked at how hydrogen’s efficiency can’t compete with electric vehicles, something we believe is a showstopper with the exception being niche use cases where hydrogen production, distribution, and conception will all be centralized. In evaluating any use case, we’ll want to probe what benefits are being realized that electric vehicles can’t provide. Are hydrogen fuel cells a solution looking for a problem? We’ll also want to probe profitability, because we’re not going to invest in companies that are subsidizing their customers. That’s the first place that Plug Power (PLUG) falls flat on its face.

This company has been around 26 years and they still haven’t figured out how to sell a product or service at a profit. But that’s all about to change, so sayeth management.

Plug Power’s Fuel Problem

The negative gross margin isn’t just riding the edge, it’s deep in the red with products and services being sold at least 20% below what they cost to produce. Fortunately, we’re provided with granularity as to which segments aren’t economically viable.

Plug appears to be subsidizing fuel costs, something that’s actively being addressed by the company. At the top of the most recent earnings call we find the following statement:

The equation for success really comes down to building out our green hydrogen platform, which will transform a negative margin hydrogen business to a growing positive margin business just by turning on the plants. We’ve already demonstrated this in Tennessee. We can generate hydrogen at one-third of the cost we’re paying from the industrial gas companies today. We won’t be discussing this issue within a year. They’ll be in the rearview mirror and the issue will be how to accelerate the plans. 

Credit: Plug Power

It’s critically important that investors hold the company’s feet to the fire. In a year’s time, they’ll be producing green hydrogen at 30% of what they were buying it for previously which should make the numbers look like this:

The first assumption we’re making is that the two fuel-related categories – 1) Power Purchase Agreements and 2) Fuel delivered to customers and related equipment – will be affected equally. We’re assuming that the first category will simply change to “Fuel produced by Plug Power factories” by next year and the number will be 30% of its former glory. As for the second category, will internal production nullify the need to deliver fuel? No, so can we expect delivery costs to be impacted because of internal production? The hint may lie in the description of the second category which is said to represent “the purchase of hydrogen from suppliers that ultimately is sold to customers and costs for onsite generation.” So, producing cheap hydrogen should transform the company into an economically viable operation after 26 years of burning through cash, but we’re waiting to see if 2023 lives up to its promises.

Plug Power in 2023

We’re not the only ones skeptical that a profitable hydrogen economy is right around the corner. At least one analyst had the cojones to call out management for (apparently) leading investors on with promises of “step changes” in margins.

And in the letter, again, you talked about a step change in fuel margins, for instance. And I know at the Symposium, you guided that minus 35%, I think, for the year, which obviously would be a big step change from where you’re at now. But with all due respect, I mean we’re going on over a year about hearing about step changes and the margins continue to drag. 

Credit: Plug Power Q3-2022 Earnings Transcript, Motley Fool

The textbook definition of “step change” refers to meaningful change, though we’ve always thought it referred to meaningful positive change that consistently happens over time. In other words, Plug Power shouldn’t magically drop their fuel costs by 70%. Or will they? Who knows, which is something the answer to the analyst’s question should have addressed. Instead, Plug Power made no attempt to explain any delay in their plans and simply reiterated their plans while blaming the high negative margins on the increase in natural gas prices.

Looking back on our last Plug Power analysis, we see concerns raised around key customers like Amazon and Walmart not only commanding a great deal of revenues, but also receiving extremely favorable terms. Visibility into customer concentration risk only happens in the 10-K filings, so investors will want to check these metrics when that information becomes available. More concerning is the absence of quarterly earnings decks that give investors updates on key metrics. In their place, you’ll find shareholder letters and press releases which ramble on about everything under the sun. Wall Street analysts trying to follow this company have their work cut out for them with nine revenue segments to analyze going forward, three of which emerged this year.

As for retail investors, they’ll need to hang on every word management says because that’s all they have. Most companies offer up an investor deck that prospective investors can peruse which highlight key value propositions. Plug Power’s featured presentation is a useless ESG report from 2021 that provides nothing of value except to scrutinize the skin color of their employees, and whether they stand up or sit down to take a piss. At least ten years ago they made an attempt to describe the return-on-investment companies might realize on Plug Power’s solutions (at the expense of Plug shareholders, of course).

The latest Plug Power shareholder letter offers up information to satiate the hopes and dreams of today’s hydrogen investor. The Biden administration has provided a tax credit – the production tax credit (PTC) – that will finally make the hydrogen economy economically viable, and a chart that shows the step changes investors can expect going into 2023 for average green hydrogen molecule fuel costs.

The year-end report, due in out a few weeks, ought to solidify the message for green tech investors – the hydrogen economy is finally here. We’ll check back a year from now to see if Plug Power can finally manage to sell their green hydrogen products and services for less than it costs to produce them.

Conclusion

There is no shortage of great companies to invest in these days at rock-bottom valuations. Plug Power has been promising investors that the hydrogen economy is right around the corner for decades now, but a holistic look at the economic viability of hydrogen shows that it can’t compete with electric vehicles on efficiency. (The new tax credits are only as reliable as the current administration.) As companies look to tighten their purse strings, they will examine which green technology platforms could be replaced with more cost-effect alternatives. Hopefully, green hydrogen adds enough value to hold its ground.