Plug Power: Plant Delays Are Another Hit To Management's Reputation

Back in April, I wrote that I'd stay away from Plug Power (NASDAQ:PLUG) until it can better prove itself. Since then, the stock is down about -7%, while the S&P is up about 6%. I reiterated that stance in June, with the stock down over -20% since that update. Let's catch up on the name.

Company Profile

As a refresher, PLUG's primary product at the moment is its GenDrive fuel cell that is used in forklifts and other material handling equipment. Its fuel cells are generally used in high volume warehouses and distribution centers that operate three shifts.

The company is also branching out to become a full-fledge hydrogen ecosystem provider. This involves everything from hydrogen production, storage, and delivery to energy distribution. The company offers a number of solutions to deliver and store green hydrogen to customers, including proton exchange membrane (PEM) electrolyzers, as well as cryogenic equipment and liquefiers.

PLUG owns a hydrogen plant in Tennessee and is in the process of building several hydrogen plants. It also owns a 407,000-square-foot facility in Slingerlands, New York and a 155,000-square-foot gigafactory in Rochester, New York.

Q2 Results and New Facility Progress

The biggest knock on PLUG at the moment is that despite strong sales growth, the company has negative gross margins. This is because it sells the hydrogen to power its fuel cells at a big discount.

In Q2, PLUG saw revenue surge 72% to $260.2 million. Most of this was from equipment sales, which jumped 86% to $216.3 million. However, the company saw its gross profit weaken to -$78.1 million from -$32.5 million. The company did note that without one-time charges, its gross margin would have been 20% better than reported.

As such, the progress that PLUG is having building out its clean hydrogen hub ecosystem is really the key to the company’s future. Without being able to produce green hydrogen at scale across regions, it has no path to profitability.

Currently, the company has four green hydrogen plants under different stages of construction. Overall, the company is now looking to have 500 tons per day (TPD) production by the end of 2025.

Its Georgia plant is the furthest along and was in the final commission stage when it reported its Q2 results last month. PLUG anticipates that the plant will go online this quarter and reach 17.5 TPD of production in Q3. It is also already looking to expand the plant’s capacity to 30 TPD. The plant already has some initial production of 2.5 TPD.

PLUG has three other plants in the U.S. currently under construction and expected to come online in 2024. Its Louisiana plant is scheduled to come online in Q1 2024, with a 74 TPD facility in New York expected to come online in the first half of 2024 and a 45 TPD green hydrogen facility in Texas projected to come online in the second half of 2024.

However, these dates have been pushed back from the company’s original timetable by about six months.

In a letter to shareholders CEO said:

"Currently, we have four green hydrogen plants at various stages of construction, and a fifth plant is in the final evaluation phase. Leveraging insights gained from our experience in Georgia, we have refined our construction plans and plant design to optimize both capital expenditure and post- commissioning operations. Despite minor adjustments in production timelines of approximately 6 months across the Plug network development, our learnings from this process strengthens our long- term positioning as the global leader in green hydrogen production. We believe Plug’s green hydrogen generation network stands to drive substantial margin expansion for Plug, as well as expedite the energy transition. In the face of extraordinary global regulatory tailwinds, Plug’s green hydrogen projects servicing industrial users through a 'build, own, and operate' framework have garnered notable traction. The project framework is carefully designed to tap into non-recourse debt and project financing, are strategically situated in close proximity to areas with sustained long-term demand and structured for firm offtake agreements from investment grade buyers. This should allow Plug to transition from funding projects from our balance sheet to assuming only 20% of the capex, thereby creating a 5 times multiplier on the capital we can allocate to expand our green hydrogen network."

In addition to the U.S., PLUG is also in the process of developing facilities in Europe as well. Its biggest venture is in Finland, where it's looking to build 3 plants would be capable of producing 850 tons of hydrogen a day. A final investment decision (FIDFID) is expected by 2026. It is also in the design process for a 35 TPD plant at the Port of Antwerp, with groundbreaking expected next year and production starting in 2025. It also has a JV with ACCIONA in Spain and Portugal, with the first 15 TPD green hydrogen plant on track from commissioning in the back half of 2024.

The delay in the timeline of the plants, while it may not seem like a big deal, is a disappointment. Getting these plants up and running is the key to better gross margins for PLUG, and until they are up and running smoothly, the company will continue to bleed cash.

And as I noted in my original write-up, PLUG management has a poor track record, so this delay doesn’t help their reputation. However, this shouldn’t come as a surprise, as back in April I wrote:

“I think it's pretty safe to assume that all these plants won't get built without a hitch and won't be running smoothly right out the gate. Building and ramping up new plants isn't easy, especially ones that are first of their kind. A lot of issues can pop up, from cost overruns to operational issues. “

Thus far, that has proven true.

Valuation

PLUG is projected to turn EBITDA positive in 2024, with the consensus call for $38.1 million in EBITDA. For 2025, it is projected to generate EBITDA of $402.8 million. Those numbers are way lower than when I looked at the stock in April.

Based on the 2025 consensus, it trades at just under 11.7x EBITDA. The market is attaching a healthy amount of skepticism that PLUG can hit that 2025 EBITDA numbers, which given its track record shouldn’t be surprising.

PLUG doesn't have many good comps when looking at valuation. Bloom Energy (BE) may be the best. It is valued at 12x 2025 EBITDA, and probably has slightly more predictability to future results.

At this point, I find it difficult to put too much stock in PLUG's forward looking numbers, as there are just too many variables with plants coming online and seeing how these actually run.

Conclusion

I would want to see PLUG prove itself before investing in the name. Management has been too unreliable, from failing miserably hitting its 2022 revenue guidance ($900-$925 vs just actual above $700 million), to delays with the buildout of its green hydrogen plants.

The PLUG story is interesting, but at this point that’s all it is: a story. As such, I would continue to stay on the sidelines and remain “neutral” on the name.