Plug Power: A Zero or Hero Play on the Hydrogen Industry

Is hydrogen the energy source of the future? Plug Power (NASDAQ:PLUG) certainly thinks so. The 27-year-old company provides green hydrogen, fuel cell systems, and other related products for its customers. It has also signed deals with two of the most recognized companies in the world: Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT).

At the same time, Plug has failed to turn a profit since its inception and has generated an accumulated deficit of $4.5 billion. In its third-quarter earnings, the hydrogen company issued a going concern warning:

“The Company is projecting that its existing cash and available for sale and equity securities will not be sufficient to fund its operations through the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q.”

To alleviate this, Plug announced a $1 billion at-the-market (ATM) offering for PLUG stock in January. While this offering provided the firm with much-needed capital, it also came at the expense of PLUG shareholders, who experienced dilution in the process. Afterwards, Plug Power disclosed in its fourth-quarter earnings that its going concern issue was resolved and that it had sufficient capital to sustain operations for the foreseeable future.

On top of that, Plug could receive another capital infusion this year. 

Also in January, Plug Power announced that it was in the process of finalizing a $1.6 billion Department of Energy loan. CFO Paul Middleton expects the loan to be finalized later this year. 

Plug’s Total Addressable Market

Plug operates in a burgeoning industry ripe for disruption based on its total addressable market (TAM). 

According to Grand View Research, the green hydrogen technology market was worth $4.21 billion in 2022. It is expected to grow to $60.56 billion by 2030 at a high compound annual growth rate (CAGR) of 39.5%. This market consists of alkaline electrolyzers and polymer electrolyte membrane (PEM) electrolyzers, and Plug specializes in the latter. The good news for the firm is that experts expect PEM electrolyzers to see higher growth over the coming years.

Deloitte estimates that the entire green hydrogen economy will generate revenue of $642 billion in 2030 and $1.4 trillion by 2050, implying a CAGR of 3.78%. 

Plug believes that the hydrogen material handling industry, which includes forklifts, will eventually grow its target addressable market to $30 billion. It expects the hydrogen electric vehicle market to be over 10x that at $300 billion. Overall, the company expects the entire hydrogen economy to be worth a staggering $10 trillion. It’s unclear when Plug expects the hydrogen economy to be worth this much, as it differs greatly from Deloitte’s 2050 estimate. In the past, Plug has issued several targets that were never reached.

Green hydrogen’s TAM estimates reveal a wide market with plenty of opportunities to generate revenue. However, retaining revenue is just as important as earning it.

Plug Power: An Unprofitable Company Growing Quickly

Plug Power generated $891.34 million of revenue in 2023, up 27% year-over-year (YOY). Sales of its equipment and related infrastructure accounted for $711.43 million of the revenue. Still, the company remains unprofitable. The costs to support its revenue totaled $1.4 billion, resulting in a gross loss of $507.79 million.

Furthermore, its 2023 net loss accelerated to $1.368 billion from $723.16 million a year ago. It attributes the increase in net loss to a higher cost of revenue and a $249.48 million goodwill impairment charge, which brought the company’s goodwill to $0. The impairment review was triggered due to PLUG stock sinking below its book value during Q4. Plug blamed this on “missed projections and reduced liquidity.”

“This fiscal year has marked a pivotal period in our journey towards growth and sustainability within the hydrogen economy,” said CEO Andy Marsh. “Recognizing the past challenges with cash management, we are dedicated in 2024 to bolstering our financial profile.”

However, analysts expect the company to remain unprofitable through 2026 before reporting GAAP earnings per share of 36 cents in 2027.

Plug’s History of Overly Optimistic Guidance

In October 2021, Plug Power provided guidance for $3 billion of annual revenue in 2025. That’s much higher than the current 2025 revenue analyst estimate for $1.59 billion. The company also guided for $1.4 billion of 2023 revenue in its 2022 Q4 investor letter. That’s about 36% higher than its actual 2023 revenue. During 2023, Plug faced several force majeure events, which resulted in severe hydrogen supply constraints and projection shortfalls. The good news is that the company believes this issue is transitory.

Analysts have forecast $1.02 billion of revenue for 2024, meaning that Plug would have to grow its sales by 194% to reach the $3 billion mark by 2025. Plug’s management clearly has difficulty with providing accurate and realistic forecasts. These overly optimistic and unrealistic forecasts have reflected poorly on the price of PLUG stock.

As a general rule of thumb, it’s better for companies to set the bar low and beat expectations rather than setting the bar high and missing expectations. 

Unfortunately, missing expectations is just one of the risks that Plug faces.

The Risks Behind Plug Power and PLUG Stock

A major underlying risk of Plug is the viability of the green hydrogen industry, according to Kerrisdale Capital. Green hydrogen differs from other types of hydrogen due to the way it is created using renewable energy.

To produce green hydrogen, Plug uses electrolysis, which involves sending an electric current through water in order to separate the hydrogen and oxygen. The resulting hydrogen gas has a low density and is then compressed and condensed at sub-zero temperatures into liquid form. Once a customer receives the liquid hydrogen, they must then use a fuel cell system to convert it into electricity. Through this process, Plug Power believes it can satisfy at least 20% of the global energy need while dramatically reducing carbon emissions.

However, Kerrisdale notes that the process begins and ends with electricity. Additionally, the process isn’t 100% efficient, or even close to that. “The result is that, even without any energy leakage in the course of hydrogen transportation, each initial kWh of electricity results in only about 0.3 kWh to the end user,” wrote Kerrisdale.

The short seller also poses an interesting question: In light of all the advances in lithium-ion battery technology, why not just store electricity in batteries instead of going through all the hassle to create hydrogen? In Plug’s defense, it could be argued that hydrogen is easier to transport and store when compared to Li-ion batteries. Li-ion batteries are also known to self-discharge when left for extended periods of time.

What’s more, providing and maintaining the equipment and infrastructure to support hydrogen power is an extremely cost-intensive process. This is clearly evidenced by Plug’s inability to turn a profit. 

During 2023, its cost of revenue grew by 56% YOY, more than double its revenue growth of 27%. Seeing costs grow at a higher pace than revenue is not an encouraging signal. Most of the costs were attributed to its hydrogen fueling installations and sales of equipment, such as its GenDrive units, GenSure stationary backup power units and cryogenic transportation trailers. The process of transforming water to hydrogen involves expensive equipment that is also costly to produce.

Profitability is PLUG Stock and Plug’s Key to Success

Estimates for green hydrogen’s potential illustrate a market in the midst of growth. However, Plug Power has yet to demonstrate that it can take advantage of this opportunity in an efficient manner. The company’s sales have undoubtedly grown throughout the years, although it hasn’t figured out a way to retain this money. In addition, the path to a $1.4 trillion green hydrogen market by 2050 will be laden with trillions of dollars of cumulative costs. That signals additional years of unprofitability for Plug.

The bull case here is that profitability improves down the line while higher revenue growth will resume in 2025 following a slowdown in 2023 and 2024. That’s what analysts expect, as they have forecast 14.27% growth in 2024, 56.10% in 2025 and 38.28% in 2026. They expect Plug Power to grow its revenue by 57.52% in 2027 while also turning a profit.

These are ultimately estimates, however, and Plug’s history of unachievable forecasts and stock underperformance doesn’t do it any favors. Since 2020, Plug has reported wider-than-expected GAAP EPS losses in 16 out of 17 quarters, including the last 14 consecutive quarters. Its rising net losses overshadow any revenue beats that it has reported. 

The bottom line is that Plug needs to prove that it can become consistently profitable. This would greatly reduce the risk of investing in PLUG stock. Until then, Plug should be viewed as nothing more than a speculative play on the green hydrogen industry.

On the date of publication, Eddie Pan held a LONG position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.