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Plug Power (NASDAQ:PLUG) stock is a feel-good stock. Electric vehicle stocks like Tesla (NASDAQ:TSLA) have enjoyed a phenomenal year in 2020, in some cases rising hundreds of percent. But hydrogen fuel-cell makers like Plug Power and Nikola (NASDAQ:NKLA) are also part of that story.
Fuel-cell-powered vehicles emit zero emissions, as the only exhaust is water vapor, and Plug Power is the leader in this space. With current technology, fuel cells are better than batteries for long-haul trucking because they take up less space and weigh less. We’re still early in the transition to a greener economy, but it looks more and more likely that hydrogen fuel cells will be the green technology of choice for the trucking industry.
Unlike rival Nikola, which produces its own line of semi trucks, Plug Power supplies the guts. It builds the engines, the hydrogen fueling stations and even supplies the hydrogen.
It’s a compelling story, and investors have been eating it up. The shares have more than tripled since the beginning of May.
When you see a stock triple in three months, it’s tempting to write it off as an irrational bubble. But it’s a little more complicated than that. Plug Power’s revenues have been exploding higher for years, even while the stock was trending lower. The chart below tracks PLUG stock’s revenues on a trailing 12 months basis. And its revenues today are more than 10 times higher than in early 2014.
This current bull market we’re living through is one that prizes growth above all else. And PLUG can credibly be said to be delivering that growth.
Before You Run Out and Buy Shares of Plug Power…
Unfortunately, that growth has not come with profitability, or at least not yet. When PLUG first came public in 2000, hydrogen fuel cells were the stuff of science fiction. Creating the product and getting it commercially viable has been a long road.
In Plug Power’s 20-year history, it’s had exactly one profitable quarter, in 2014, when it earned 2 cents a share. It’s come close to turning a profit every quarter since then but it just can’t quite seem to get there.
When you don’t make money for the better part of two decades, you have to find a way to pay your bills. And for Plug Power, the solution has been to simply issue more stock. The company has been a serial share issuer for its entire life as a public company, and it’s more than doubled its shares outstanding over the past six years. This constant share dilution is a major reason why the shares have only started to rally recently, despite the company’s impressive growth profile.
It’s not unusual for a company to go to the market for a secondary offering in its early years as a public company. But this is excessive to the point of being ridiculous.
Let’s talk valuation. At current prices, PLUG trades hands for 12 times sales, putting it about on par with Tesla. At current prices, Tesla trades for just under 14 times sales.
That’s expensive. Really expensive. To put it in context, it’s nearly double Apple’s valuation by that metric, and Apple is far from cheap.
Bottom Line on PLUG Stock
In order to justify a valuation like that, PLUG needs more than just revenue growth. It needs profits … and a lot of them.
I can’t recommend Plug Power at current prices, or at least not as a long-term holding. But if you’re looking to ride the boom in electric vehicle stocks a little higher, PLUG is as good of an option as any. PLUG has a lot of momentum right now, and no clear catalyst to get in its way. So again, PLUG might make a nice short-term trade.
Just don’t fall in love with it. The stock is simply too expensive and too unprofitable to seriously consider as a long-term holding. Trade Plug Power. Just don’t marry it.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management LLC, a registered investment adviser based in Dallas, TX. As of this writing, he did not hold a position in any of the aforementioned securities.
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