Plug Power (PLUG) is a fuel cell company whose stock has rallied 763% in 2020. Fuel cells use hydrogen to produce electricity cleanly, without combustion or emissions. Currently, PLUG fuel cells are used to operate forklifts in Amazon’s (AMZN), Walmart’s (WMT), and Home Depot’s (HD) warehouses. PLUG is also getting involved in the electric vehicle (EV) market.
For most parts of the economy, the coronavirus pandemic has been devastating. According to S&P Global Market Intelligence, on average, companies experienced a double-digit decline in revenue in the second and third-quarters.
However, PLUG was an exception as its revenue increased by 17% and 81%, respectively. Additionally, the company’s backlogs also grew.
Catalysts
PLUG did see some effects due to the pandemic, as it noted some of its customers delaying orders. However, it was one of a handful of companies able to maintain growth during these difficult conditions. Notably, it also upped its guidance for 2021 above analysts’ expectations as it’s looking for gross billings of $450 million compared to $310 million this year.
A contributor to PLUG’s 763% gain this year is the increase in risk appetites among investors towards EV and cleantech stocks. A considerable amount of froth has been building in the sector which is evidenced by the number of companies with billion-dollar valuations while not having any revenues. Thus, even though PLUG grew revenues at an impressive rate this year, its price to sales ratio increased from 3.5 to 26.
Another catalyst has been generous government policies to clean technology companies, like PLUG, all over the world. Administrations in Asia and Europe are creating incentives for consumers and businesses to spend on “green energy”. Additionally, during the campaign, President-elect Joe Biden laid out an ambitious energy plan to spend $2 trillion in four years on upgrading the grid, building charging stations, tax credits, increasing alternative energy investments, and incentivizing purchases of EVs.
In addition, PLUG has benefitted from the rapid technological improvements throughout the clean technology industry. We’re quickly approaching the day when clean technology is becoming superior to fossil fuels without any subsidies. The cost of solar panels and batteries has been falling faster than expected. Therefore, many investors believe that cleantech companies deserve higher multiples because their margins will be higher.
PLUG’s Strategy
PLUG was founded in 1997. The business has managed to survive and grow during recessions and periods when alternative energy was out of favor.
In large part, it’s due to PLUG’s strategy. Although the company has always had ambitions to commercialize its fuel cell technology and use it for a variety of applications, it started off with a relatively small market – forklifts.
Globally, the forklift market is a $30 billion market. PLUG has captured about 15% of this market. Most forklifts are gas-powered or electric. In contrast, PLUG’s are powered by its hydrogen fuel cells. PLUG’s forklifts have more range and are more powerful than its competitors which demonstrates the capability of its fuel cells.
Once it proved that its technology worked for this segment, it began to look at markets with more potentia,l like commercial transport, passenger transportation, utility backup, and powering data centers.
What’s Next?
The POWR Ratings are bullish on PLUG as it has a Buy rating. It has an “A” for Trade Grade and a “B” for Buy & Hold Grade and Industry Rank. Among Industrial – Equipment stocks, it’s ranked #26 out of 59.
PLUG is in a growing sector, it has proven itself by winning market share in the forklift market, and is looking to move into new areas with even more upside. In 2020, the company consistently topped analysts’ expectations and hiked guidance. If the company continues to execute, then the stock could keep climbing higher
However, after such a massive rally year-to-date, the stock price may already reflect all these positive fundamentals and there are some risks that investors should be aware of.
One is the general froth surrounding the EV and cleantech market. If there is some profit-taking, then it’s likely that all the stocks in the sector will move lower.
PLUG is a volatile stock which has experienced one 50% and two 30% drops in it’s stock price during market pullbacks in 2020. A catalyst for this could be a rise in interest rates and growth expectations for 2021. Such a development might lead investors to be less sanguine about high-multiple stocks, such as PLUG.
Another risk for PLUG is that it will still require more capital to achieve its objectives. Last month the company was able to raise $1 billion by issuing stock. Due to the favorable climate for clean energy stocks, the offering was quickly snapped up with minimal effect on its stock price despite the dilution. It’s certain that PLUG will be tapping equity or debt markets for capital in the future, but more dilution could have a negative impact on the price.
Ultimately, such corrections could prove to be optimal entry points for investors as the company’s long-term direction will be determined by its ability to commercialize its fuel cell technology and build out its hydrogen network.
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PLUG shares rose $0.07 (+0.26%) in after-hours trading Thursday. Year-to-date, PLUG has gained 760.44%, versus a 15.58% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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