Plug Power (NASDAQ:PLUG) stock has ridden a massive wave of investor enthusiasm. Shares in the forklift fuel cell maker have rocketed 286% this year as retail investors ogled over its 32% topline growth. As the coronavirus pandemic has kicked warehouse fulfillment centers into high gear, Plug Power has gone from a struggling company to an investor darling with a $5 billion market capitalization.
Not so fast.
The company’s promising deals with Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) hide a stingingly dreadful set of financials. Once you account for the company’s leasing interest, gross margins come in at negative 1.4%. Its sale practices point to desperation.
In other words, no matter how large the company grows, it will keep losing money unless something big changes. So, before you even consider buying PLUG stock, here’s why insiders are selling out of this seemingly promising company.
Promising Technology Hides an Ugly Truth
In all reality, I’m a fan of hydrogen fuel cell technology. And Plug Power is one of the most prominent players.
Hydrogen fuel cell technology provides far faster recharges than lithium-ion batteries, currently used in Tesla (NASDAQ:TSLA) and other electric vehicles. It only takes three to five minutes to refuel a hydrogen fuel cell, compared to 30 minutes or more to recharge a battery.
That makes hydrogen fuel cells extremely useful in industrial settings that need 24/7 usage. Fast recharges mean that forklifts and heavy truck operators don’t have to idle their machinery for long.
There’s a downside, however: hydrogen fuel cells aren’t that efficient. Their well-to-wheel efficiency resembles that of gasoline engines at 25% to 35%. Meanwhile, lithium-ion batteries are far more efficient at converting stored power into energy, achieving a well-to-wheel efficiency of 70% to 90%. That means hydrogen fuel cells will remain a niche industrial product for now. But with 23 million industrial vehicles still relying on natural gas, there’s plenty of room for Plug Power to grow.
But here’s where the good news ends.
PLUG Stock: A House of Cards
Plug Power has continuously struggled to turn a profit. More accurately, Plug Power has struggled to SELL its products at all.
Take-up rates from Walmart and Amazon have been excruciatingly slow. Since its 2007 release, PLUG’s GenDrive has sold just 35,000 units across 2,800 systems. The terms weren’t that good either. To make its $70 million deal with Amazon in 2017, the company had to offer 19% of its shares as warrants to the e-commerce giant. Its $80 million Walmart sale went for 17% of its shares.
That screams desperation. A great product that saves customers thousands of dollars should fly off the shelves.
Take Rivian, for example. In 2019, the electric-van startup received $700 million in funding (that’s actual cash, not warrants) from Amazon and signed a deal for 100,000 units due for delivery between 2021 and 2024. Those are the deals that say, “I have a great product.”
But what about Plug Power?
Here’s a Deal…
To sell its products, Plug Power turned to a favorite financial trick of mine: operating leases.
Here’s how it goes. If Walmart and Amazon won’t pay for hydrogen fuel cells today, why not let them make payments over time? A sale gets made, and Plug still gets to record revenue (even if it’s drawn out over several years). On its face, that sounds like a genius solution: everyone wins in the long run.
But there’s a significant problem. How can Plug afford to build all its kit today without receiving payment for years? That’s where debt financing comes in.
To run its leasing operation, Plug had to take out loans. And a lot of them. In Q2, the company had $653 million of outstanding debt and capital leases.
Those borrowings have left a streak of financial ruin across its balance sheet. Its Altman-Z score, a measure of solvency, stood at negative 1.18 in 2019 (a score of under 1.8 suggests financial trouble). Plug Power now pays 12% interest on its loans.
Operating Leases Won’t Save Plug Power
PLUG stock bulls might contest that the company also has cash sales. And that’s true. An obscure accounting rule, ASC Topic 842, means the company lumps cash sales and operating leases together.
But the numbers on PLUG’s balance sheet don’t lie (or at least we hope they don’t, or else the company has an entirely different problem). When Plug creates an operating lease, its lenders require some form of collateral. Many leasing companies naturally use the underlying product (in Plug’s case, their hydrogen fuel cells). But the company also needs to set aside cash, known as “restricted cash,” on its balance sheet as additional collateral.
The financing deals have created a nightmare for Plug Power’s liquidity. The company’s restricted cash jumped by $158 million in 2019, while repayments of finance obligations topped $61.7 million. And how much did Plug generate in sales? Just $150 million from fuel cell systems and hydrogen installations.
Many Unhappy Returns
PLUG stock bulls will point out that collateral will eventually decline as operating leases mature. And that’s also true: without future growth, the company’s balance sheet will ultimately return to normal.
But its collateral agreements increase both invested capital and interest payments without generating additional profit. That pushes return on invested capital (ROIC) down. And any Finance 101 course will tell you that a low ROIC reduces a stock’s fair value.
Angel Investors Swoop In
The company, however, ran into some luck this year. As investor interest in electric vehicles and clean energy grew, so did Plug’s ability to convert its debt into equity. In 2019, the company raised $158 million from stock sales. And in 2020, the company raised another $205 million in a convertible senior note sale.
The income from these share sales replaces the company’s debt funding for its cash collateral. While banks and professional lenders asked for a 12% interest return, retail investors now give Plug a cost of equity of just 8.66%.
That doesn’t change the underlying problem (i.e., Plug still relies on operating leases to push its product out the door). But it does mean the company won’t go bankrupt if they can keep selling more shares.
Insiders Are Getting Out
Insiders, however, aren’t taking that bet. Because as soon as (or if) PLUG stock collapses, the company would find itself back at the mercy of its creditors.
Today, CEO Andrew Marsh holds just 198,680 shares in the company and sells his stock options as quickly as he’s awarded them. Other officers, including its corporate controller, general counsel, and chief strategy officer, hold either zero shares or so few shares that the number looks like a rounding error.
Clearly, insiders think there’s something wrong.
Can PLUG Stock Make it?
There are reasons to get excited about Plug Power. The company remains the top hydrogen fuel cell maker in the U.S., and number four or five worldwide. It spends almost $40 million per year on R&D and may yet create a breakthrough in fuel cell efficiency. Its current 2,800 installed sites also put a foot-in-the-door for future contracts.
But with switching costs relatively low and lithium-ion technology continually improving, Plug is fighting an uphill battle to acquire new clients. If the company needs to work this hard to get customers, doesn’t it feel like there’s something wrong?
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.