The stock market is spooked by rising interest rates. Growth stocks especially, since their valuations are built on the back of low interest rates. No growth stock has been spared in this carnage. Not even some of the highest-quality growth stocks with the biggest potential, like Plug Power (NASDAQ:PLUG) stock.
Indeed, the hydrogen economy leader has been among the biggest losers this past week, losing almost a quarter of its value.
This dip in PLUG stock is a golden opportunity to buy a key player in the disruptive clean energy industry.
Here’s the thing:
- The rising rates headwind is ephemeral and overstated.
- Plug Power’s stock plunged on this short-lived headwind.
- Plug’s core business fundamentals remain robust, and its tailwinds remain long-term (high adoption rates, attractiveness of hydrogen tech, ever-expanding partnership network spanning all energy markets).
- The rising rates headwind will pass soon.
- When it does, Plug’s favorable fundamentals will return to the spotlight.
- PLUG stock will rebound.
It’s that simple. Don’t overthink this one. Forget the noise. Listen to Warren Buffett. Get greedy when others are being fearful. And the buy the dip in what could be one of the market’s biggest winners of the 2020s.
Rising Rates Headwind Is Temporary
The recent rising in interest rates — the 10-Year Treasury yield has pushed above 1.3%, from 1.1% at the start of the month — is something to watch closely. But its impact on the market is both ephemeral and overstated.
Rates are pushing higher right now because of huge fiscal and monetary stimulus. That inflationary force will continue for the foreseeable future. But it’s simultaneously fighting against much-bigger, much-more-enduring deflationary forces in automation and globalization.
That is, automated technology is capable of replacing millions of jobs today. Think language processing software automating call-centers and customer service reps. Think self-check-out kiosks automating cashiers. Think telehealth platforms automating front-desk folks at hospitals.
Technology has advanced to the point of being ready to replace millions of jobs. At the same time, thanks to Covid-19, more and more enterprises are comfortable with adopting these technologies. The result is that, over the next few years, we are going to see huge and permanent job loss in some sectors of the economy.
That’s an enormous deflationary force.
Equally as powerful is globalization, as the global geopolitical stage is now set for globalization to come back into the spotlight and for companies to more aggressively outsource labor and production – which will keep consumer prices low.
So, yes, the government is spending a bunch of money. But they almost have to spend a ton of money just to keep rates from going negative.
Long-term, we are stuck in a lower-for-longer situation with interest rates.
That’s important. Higher rates will hurt equity valuations, but my numerical analysis of the relationship (dating back to the 1980s) between interest rates and equity valuations found that the 10-Year Treasury yield must rise to 2.5% before it has a meaningful impact on valuations.
News flash: That isn’t going to happen anytime soon.
So, the recent weakness in the stock market is a buying opportunity. That’s especially true in high-quality growth stocks like PLUG stock.
Plug Power’s Fundamentals Remain Robust
Plug Power stock has plunged about 25% over the past five days. Ostensibly, you’d think that the company reported miserable earnings or lost a big deal. You’d assume that the company’s fundamentals are rapidly and significantly deteriorating.
They aren’t. At all.
The world is still pivoting rapidly toward clean energy adoption, propelled by supportive legislation, shifting consumer demand, falling costs and improving technology. Hydrogen fuel cells are gaining significant traction in certain clean energy end-markets. This includes long-haul transit and heavy-usage materials handling, where the benefits of density, range and power output compared to plug-in batteries shine bright.
Above all else, Plug Power is still leveraging its early technology leadership in making HFCs. This allows Plug to establish an expansive partnership network spanning across the entire hydrogen economy, including autos (with Renault), stationary (with SK Group) and materials handling (with Walmart).
This means Plug is still the unrivaled leader in the booming Hydrogen Economy.
Ultimately, once this ephemeral rising rates headwind reverses course, PLUG stock will rebound in a big way.
Plug Power Stock Is Now Undervalued
The recent sell off in PLUG has plunged shares into undervalued territory. Here’s the back-of-the-envelope math:
The Hydrogen Economy is expected to grow revenues at a ~10% annualized pace into 2030. Plug Power will continue to rapidly expand share in the market, as the company replicates its dominance in the materials handling market, in ancillary markets like stationary and autos. The company will likely sustain 20%-plus revenue growth over the next decade.
Profit margins will improve with scale, since HFC manufacturing costs will fall as production ramps up. This will lead to significant profit margin expansion, and likely turn 20%-plus revenue growth into 40%-plus profit growth.
Net net, my numbers say that Plug Power will grow earnings toward $6 per share by 2030. Based on a 20X forward earnings multiple and an 8% annual discount rate, that implies 2021 price target of nearly $65.
Perhaps not coincidentally, Plug Power just sold a bunch of stock at $65 per share recently.
Bottom Line on PLUG Stock
Plug Power is a long-term winner. Recent weakness is a gross overreaction to the ephemeral rising rates headwind. This headwind will reverse course soon. Once it does, this sell off will end. PLUG stock will bottom, and rush back to all-time highs.
P.S. Now, PLUG is a great stock to buy… but it’s not my favorite stock to buy. Instead, my favorite stock pick is one I believe could turn into the next Amazon. Click here to find out the name, ticker symbol, and key business details of this potential 10X stock pick. During my first-ever Exponential Growth Summit on Tuesday, Feb. 23, I’ll give away this pick for FREE. Plus, I’ll be revealing a secret new product that is the single most exciting project I’ve ever worked on. Hope to see you there!
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.