Plug Power (NASDAQ:PLUG) stock might have surged by 142% in year-to-date 2019. But I remain skeptical about the scalability of the business model in the long term. Understandably, Plug Power has different views. The company is targeting revenue of $1 billion and adjusted EBITDA of $200 million by 2024.
Considering the rally in Plug stock, the markets, in general, also seem to be more optimistic than my view. This coverage will focus on the hydrogen fuel cell economics, which is the primary reason for my cautious outlook.
A recent article from Reuters presents some interesting data related to the hydrogen fuel cell cars. Toyota Motor (NYSE:TM) launched fuel cell passenger car (Mirai sedan) in 2014. Less than 10,000 cars were sold globally. Similarly, Hyundai Motor (OTCMKTS:HYMTF) launched Nexo crossover and less than 2,900 cars were sold globally. Clearly, demand has yet to gain traction.
Talking about hydrogen fuel cell cars is relevant here because Plug Power develops hydrogen fuel cell engines and stations for the broader transportation market. Be it consumer or transportation vehicles, the reason for sluggish growth in hydrogen fuel cell vehicles needs to be investigated.
Battery-Powered Electric Cars Are a Better Choice
According to a November 2016 Stanford study, “investing in all-electric battery vehicles is a more economical choice for reducing carbon dioxide emissions.” The study also adds that “hydrogen fuel is derived from natural gas through an industrial process that emits carbon dioxide as a byproduct.”
Therefore, the key challenge with hydrogen fuel cells is that they’re a relatively expensive option. My point is also backed by data from California Fuel Cell Partnership: “[T]he most common price is $13.99 per kg (equivalent on a price per energy basis to $5.60 per gallon of gasoline).”
I want to mention here that Tesla (NASDAQ:TSLA) CEO Elon Musk opined that hydrogen fuel cells are “mind-bogglingly stupid” and that “Success is simply not possible.” I believe that the view on “success” is largely related to the cost economics.
It’s Not All Gloom for Plug Power Stock
While I have discussed a broader concern for hydrogen fuel cells, it’s not all gloom for the company or industry.
Even as the company is primarily targeting the materials handling segment for growth through 2024, I believe that the EV segment will grow. However, it would be unrealistic to expect stellar growth.
As Reuters suggests, China, Japan and South Korea are looking to “put millions of hydrogen-powered vehicles on their roads by the end of the next decade.”
This is a relatively long-term vision. However, countries are working toward adoption of hydrogen fuel cells and potentially improve the economic cost through technology.
As an example, an article from Harvard Business School indicates that the Tokyo Metropolitan Government “has set up a ¥40 billion ($330 million) fund to promote the use of hydrogen energy and build up Japan’s ecological technologies ahead of the 2020 Olympic Games.”
In addition, there is little doubt that fuel cell technology is efficient in the materials handling segment. According to the U.S. Department of Energy, “Based on preliminary analysis of early MHE deployments, cost of ownership and operational assessment shows significant advantages of fuel cell powered lift trucks compared to battery powered units.”
Therefore, the company’s material handling segment can be a potential growth driver in the coming years.
Final Thoughts on PLUG Stock
Plug Power stock has also surged in 2019 with the company likely to report positive EBITDA for the full year. However, the challenges are far from over and it remains to be seen if the business model is scalable in the near to medium term.
After a big rally in 2019, I would recommend investors to stay in the sidelines. If there is a breakthrough related to cost economics, Plug Power can be a money multiplier. If not, I don’t see enough top-line growth to excite the markets.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.