Plug Power (NASDAQ:PLUG) has had a phenomenal year, with shares up 140% year-to-date. The company has achieved some operational momentum on the top line, and the company’s story has picked up appeal. More and more futurists are talking about the coming hydrogen economy. That helps build the narrative for Plug Power and its fuel cell technology.
In theory, hydrogen is a clean, abundant and surprisingly safe fuel that could provide for much of humanity’s energy needs in a cheap and green way. Unfortunately, as InvestorPlace’s Josh Enomoto recently detailed, there are still some practical problems with converting hydrogen from an effective fuel in a laboratory setting to mass market real-world usage.
Companies like Toyota (NYSE:TM) have experimented with hydrogen vehicles, but so far, little has advanced beyond niche markets.
Plug Power’s shares have fallen from as high as $1,000 each (split-adjusted) in the late 1990s to just $3 now. A major reason for that is that Plug Power’s business has never reached adoption at large scale.
Even with a major tax incentive to push fuel cells, the economics still haven’t penciled out for most customers. Unless you are a major customer that can utilize the devices at nearly all hours, the efficiencies just haven’t been there. This has limited Plug’s customer base to a small group of companies that have been able to drive hard bargains with Plug Power. This has kept Plug Power’s margins down, and caused it to burn tons of cash over the years.
Recent efforts to broaden the customer base haven’t fixed matters. Plug Power has managed to grow revenues. But in doing so, it has had to resort to vendor financing, which strains the balance sheet. This form of financing means that Plug has to come up with cash to build its products while customers can pay for them slowly over time. All the while, Plug Power’s expensive debt continues to rack up more interest and the company has to issue more and more stock to pay the bills.
Plug Power Stock: Unfathomable Dilution
From fiscal year 2010 through to the most recent reported quarterly results, Plug Power’s shares outstanding grew twenty-fold. The tally surged from 13.1 million shares a decade ago to 226.8 million. This means that if you owned 100 shares of PLUG stock a decade ago, you would have had to purchase another 1,900 shares by the end of the decade simply to maintain the same amount of ownership.
Let’s put it another way. If you owned 1% of Plug Power’s outstanding stock in 2010, your ownership position was down to a paltry 0.05% within a decade. This is hyperinflation of the share printing variety, and leads to the same result as when a country prints too much currency — greatly devalued paper.
And there’s no sign of it ending anytime soon. The share count will be up again as it just fired off another massive dilution this quarter, with a 40 million share offering plus 6 million on top of that in the underwriters’ over-allotment. That’s another 20% dilution to the share count. But who’s keeping track at this point?
Incredibly, things are set to get even worse. A recent report from Spruce Point Capital noted all the upcoming dilution in Plug’s stock coming from the warrants Plug Power issued to Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) along with the convertible bonds, restricted stock grants and other such sources. All told, the potential dilution would add at least another 200 million shares to Plug Power’s base.
At that point, Plug Power would have roughly half a billion shares of outstanding stock. That, on a $3 stock price, would lead to a $1.5 billion market cap. This is simply absurd for a company that has never generated consistent profits and burns prodigious amounts of cash. Don’t let the $3 share price fool you, Plug Power is exceptionally expensive at this valuation.
Plug Power’s Bottom Line
In investing, it’s crucial to remember to treat the story and the actual financial results as distinct entities. Plug Power has a compelling story, and I understand why bulls get excited about the company’s potential. But cool possibilities alone won’t put more money in your brokerage account.
Unfortunately, Plug Power has been operating off this promise of future results for more than two decades now. Yet it simply hasn’t translated into lasting profits. And there’s little sign 2020 will be the inflection point for the company either. As such, it’s time to lock in Plug Power near the highs, and wait for a lower re-entry point.
Given Plug Power’s anemic financial results, the company will likely continue to burn tons of cash and need to raise more capital going forward. That, in turn, will cap the share price’s upside. Also, there will probably be a selloff when another secondary offering or other dilutive financing package hits.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.