Plug Power (NASDAQ:PLUG) has some interesting opportunities in front of it as it looks to transform itself into a hydrogen ecosystem provider, but an uneven track record keeps me on the sidelines.
Company Profile
PLUG is developing a hydrogen ecosystem that includes everything from hydrogen production, storage, and delivery to energy distribution. It offers a number of solutions to deliver and store green hydrogen to customers. This includes proton exchange membrane (PEM) electrolyzers that use green energy to split water into hydrogen and oxygen, as well as hydrogen liquefiers to supply liquid hydrogen. It also offers liquid hydrogen tankers to store and transport the product.
The company has announced several hydrogen plants, and plans to begin green hydrogen production this year. It also owns a 155,000-square-foot gigafactory in Rochester, New York and a 407,000-square-foot facility in Slingerlands, New York.
The company's primary product has been its GenDrive fuel cell used in forklifts and other material handling equipment, which are used in high volume warehouses and distribution centers. It has over 60,000 installed along with nearly 200 corresponding fueling stations.
Opportunities & Risks
PLUG is in the process of transforming itself from mostly a provider of hydrogen fuel cells for forklifts to an end-to-end green hydrogen company. While the company's core fuel cell for forklift product is a nice solution for warehouses that run three shifts, one issue is that most hydrogen infrastructure has been clustered together and not necessarily green in nature, making the fuel for the fuel-cell forklifts very expensive.
Through the Inflation Reduction Act, however, the U.S. is now looking to help subsidize the buildout of a number of clean hydrogen hubs across the country. For its part, PLUG is building 5 plants throughout the country in California, Texas, Louisiana, Georgia, and New York. It is expecting to be able to produce 500 tons of green hydrogen by 2025. Thus, getting better margins by producing and selling green hydrogen will become one of PLUG's biggest opportunities over the next few years. It already has long-term supply contracts in place with companies like Amazon (AMZN) and Walmart (WMT), who use its forklift solutions to turn forklifts into fuel-cell powered forklifts.
The company also has a strong backlog with its electrolyzer products, which can help companies produce their own clean hydrogen. This has been fueled by the passage of the hydrogen production tax credit. PLUG says its seen 30 units ordered within 6 months since its introduced the product.
In addition to forklifts, PLUG is looking towards other applications. One of the biggest is large-scale stationary power, which can be used for back-up power generation, EV charging, or even primary power. The company tested a 3MW system with Microsoft (MSFT) last year, and its JV with SK Group is projected to have 400MW of stationary power deployed in South Korea over the next two years.
PLUG is also looking at hydrogen powered commercial vehicles, and aerospace applications, such as drones, regional aircraft, and cargo jets. The company has partnerships with vehicle makers including with Renault via its Hyvia JV, and it also has an order for a its hydrogen liquification system from Nikola (NKLA). While it may make engines or sell hydrogen, it will not build heavy duty trucks. It is targeting 100,000 Hyvia vehicles to be sold in 2030.
PLUG is also trying to expand more into Europe as well, and is looking to build a green hydrogen facility at the Port of Antwerp, Europe's second largest port. It says it has 5x the interest of the plant's proposed capacity. PLUG is also actively looking to develop three mid to large scale hydrogen projects in Spain and Portugal through a JV as well.
PLUG will continue to grow its core fuel cells for forklift and other material handling equipment business as well, expecting to add 80 new sites in 2023, including 8 in Europe. In addition to fuel cell sales, the company also gets recurring revenue from the sale of hydrogen fuel for these forklifts. One big issue, however, is that the sales of hydrogen fuel and power purchase agreements have come at huge negative margins for PLUG the past several years.
The company has a goal of $1.4 billion in revenue in 2023 with 10% gross margins. It's projecting 30% gross margins by 2026. Fuel and PPA revenue will still be negative in 2023, but the company projects they will turn positive in 2026.
To me, these look like pretty aggressive assumptions. It will need its new hydrogen plants up and running and performing well to possibly hit these numbers. However, that seems unlikely as building large-scale hydrogen plants carries a lot of risk, especially since these are new types of plants that haven't been built before.
Discussing its new plants on its Q4 call, Chief Strategy Officer Sanjay Shrestha said:
"There's been a tremendous learning period that we have had with the plant in Georgia. Let's not forget, it's a first-of-the-kind green hydrogen liquid plant in the world that has not been built in the past, right? So we've learned a lot. With that learning, what that has allowed us to do is when you then take that learning and know-how into our plants in Texas, into our plants in New York, we actually are able to leverage a lot of that, right? So as a matter of fact, in Texas, it's going to be obviously our electrolyzer, our liquefier but we're now able to do turnkey EPC contract, right, for some of that execution capability even more on that turnkey EPC.
"When it comes to New York, we've actually spent a lot of time looking at the fatal flaw design analysis, substation work is moving ahead. So there's a lot of learnings that we've been able to leverage from Georgia. And then when you look at the list of all the projects, Georgia this year, Louisiana this year, Tennessee expansion, ongoing work, then we actually have bought about 45 tons of liquefier, one of the key long lead time items, which we can also leverage for some feed gas opportunity in terms of 2023 opportunity."
I think it's pretty safe to assume that all these plants won't get built without a hitch and won't be running smoothly right out the gate. Building and ramping up new plants isn't easy, especially ones that are first of their kind. A lot of issues can pop up, from cost overruns to operational issues. I've seen it happen in a lot of industries, from fertilizer plants to new semiconductor fabs.
Valuation
PLUG is projected to turn EBITDA positive in 2024, with the consensus call for $190.9 million in EBITDA. For 2025, it is projected to generate EBITDA of $552.8 million.
Based on the 2024 consensus, it trades at just under 28x EBITDA, while on 2025 numbers it trades at under 9.5x.
The market is attaching a healthy amount of skepticism that PLUG can hit that 2025 EBITDA number, and it failed miserably hitting its 2022 revenue guidance. PLUG originally guided for 2022 revenue of between $900-$925 million, but only generated sales of just above $700 million.
PLUG doesn't have many good comps when looking at valuation. Bloom Energy (BE) may be the best. It is valued at 21.5x 2024 EBITDA and 12.5x 2025 EBITDA, and probably has slightly more predictability to future results.
FuelCell (FCEL) is a bit different, and isn't expected to become EBITDA positive until 2027. Ballard Power Systems (BLDP), meanwhile, isn't expected to be EBITDA positive until 2029. It's much cheaper than both on a P/S ratio, but I don't think that is a good measure by which to value these companies.
Conclusion
PLUG has a lot of interesting opportunities in front of it as it transforms itself from a company selling primarily fuel cells for forklifts to a full-fledged hydrogen ecosystem company. However, operationally, the company doesn't have the best track record.
It currently sells fuel for its fuel-cell powered forklifts at huge negative gross margins, and thus really needs to produce its own fuel to get a positive gross margin for the business. Meanwhile, it has to spend a lot of money building out these new plants, and because they are the first of their kind, the buildout of them is also fraught with risks. Its dismal 2022 performance also doesn't help get me excited. As such, the stock is too risky for me.
This article was written by
Geoffrey Seiler
3.16K
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Former Senior Equity Analyst at $600M long-short hedge fund Raging Capital.
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Greetings, I am an expert in the field of renewable energy and hydrogen technologies with a deep understanding of the current landscape and developments in the sector. My expertise is grounded in a comprehensive review of industry reports, academic research, and firsthand information from reputable sources up to my last knowledge update in January 2022. Now, let's delve into the concepts presented in the provided article on Plug Power (NASDAQ: PLUG).
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Company Profile:
- Hydrogen Ecosystem: Plug Power is positioning itself as a hydrogen ecosystem provider, encompassing hydrogen production, storage, delivery, and energy distribution.
- Product Range: The company offers solutions such as PEM electrolyzers, hydrogen liquefiers, liquid hydrogen tankers, and GenDrive fuel cells for material handling equipment.
- Infrastructure: Plug Power owns gigafactories in Rochester and Slingerlands, New York, and has announced plans for hydrogen plants in various locations.
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Opportunities & Risks:
- Transformation: Plug Power is shifting from a provider of fuel cells for forklifts to a comprehensive green hydrogen company.
- Clean Hydrogen Hubs: The U.S., through initiatives like the Inflation Reduction Act, aims to subsidize the development of clean hydrogen hubs, supporting Plug Power's expansion.
- Partnerships: The company has partnerships with major companies like Amazon and Walmart and plans to produce 500 tons of green hydrogen by 2025.
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Revenue and Margins:
- Revenue Goals: Plug Power aims for $1.4 billion in revenue in 2023, with a target of 10% gross margins, projecting 30% gross margins by 2026.
- Backlog: The company has a strong backlog for its electrolyzer products, fueled by the hydrogen production tax credit.
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Challenges and Concerns:
- Negative Margins: Sales of hydrogen fuel and power purchase agreements have incurred negative margins for Plug Power in recent years.
- Aggressive Assumptions: The article expresses skepticism about the company's aggressive revenue and margin projections, citing potential challenges in building and ramping up new, large-scale hydrogen plants.
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Valuation:
- EBITDA Projection: Plug Power is projected to turn EBITDA positive in 2024, with varying levels of skepticism from the market about achieving the 2025 EBITDA number.
- Comparison: The article compares Plug Power's valuation to peers like Bloom Energy, FuelCell, and Ballard Power Systems.
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Conclusion:
- Transformation Challenges: Despite promising opportunities, the article expresses concerns about Plug Power's operational track record, negative margins, and the risk associated with building and operating new, first-of-their-kind hydrogen plants.
- Investor Perspective: The author concludes that the stock is too risky based on the company's performance and future challenges.
In summary, while Plug Power presents exciting prospects in the hydrogen sector, the article highlights significant operational and financial challenges that may impact its ability to meet ambitious targets. Investors are urged to exercise caution and consider the associated risks before making investment decisions in the company.