If I had to choose a hydrogen company that has significant potential to change the landscape for hydrogen in the US, it would be Plug Power. Plug Power has been in the spotlight recently because of not only its share price but announcements indicating significant growth ahead. Now it’s really gaining momentum.
Plug Power Business
Plug Power (NASDAQ: PLUG) has been around since 1997. It was actually founded as a joint venture between DTE Energy, a utility, and Mechanical Technology Inc, going public in 2002. Plug Power’s main line of business has been supplying fuel cells for indoor forklifts. Since then it has branched out to providing fuel cell engines for delivery vehicles and also for heavy duty trucks.
New markets have opened up for Plug Power, including the aviation, utility, data center and microgrid sectors for stationary power. Some of these new opportunities have opened up because of acquisitions.
Key customers that have adopted Plug Power technology include: FedEx, Amazon, CSX, BMW, Home Depot and Walmart among others. As they expand their product offering, you’ll start to see a more diversified customer base. The market for drones, fleet vehicles, residential backup power and consumer electronics is wide open.
Over the last 13 years, Plug Power has made a series of acquisitions, starting in 2007 for Cellex and General Hydrogen. In 2014, it purchased ReliOn. That was followed by the acquisition of American Fuel Cell in 2018 and EnergyOr in 2019. Plug Power capped off their shopping spree when they bought United Hydrogen and Giner ELX in 2020.
American Fuel Cell and Giner ELX are key acquisitions that strategically position Plug Power strongly for the future. American Fuel Cell provides Plug Power with membrane electrode assemblies (MEA) that are key supply chain components of fuel cells. The Giner ELX acquisition gives Plug Power a robust expansion into the electrolyzer market, allowing Plug to have more vertical integration from hydrogen fuel production to end use.
In my post, “Hydrogen Fuel Cells on the Horizon,” I talk about Plug Power’s strategic investment from Amazon (NASDAQ: AMZN). Having the backing from Amazon is a big deal. Their investment in $55.3 million of Plug Power stock and $70 million in equipment gives Plug a huge boost for technology development. Amazon, with its fulfillment centers, is a large user of forklifts.
Plug Power Financials
Top line growth for Plug was $230 million in 2019. They grew revenues by about 32% over the prior year, outpacing peer Ballard Power (NASDAQ: BLDP) by 20%. Over the last 8 years, Plug has had a compounded annual growth rate in revenues of 36%. Plug’s gross profit margin was 18% last year and has been improving over time.
Plug Power has a current market capitalization of about $4.7 billion, putting it at the top of all US pure play fuel cell companies.
Plug Power is highly leveraged. At the end of 2019, its leverage ratio was 80%, meaning that 80% of its capitalization comes from debt. This can be worrisome if the ability to pay back debt weakens – something to watch if the global economy softens further.
While this may seem like a lot of debt, in a low interest rate environment, Plug benefits from a low cost of capital. This is fuel for further acquisitions and can provide greater returns for shareholders. That is – only if Plug is able to continue to grow revenues, control costs and increase profitability.
Plug has seen debt issuance grow significantly over the past five years. While benchmark rates have increased over the past 8 years, which would make borrowing more expensive, corporate credit spreads have actually declined. Lower corporate credit spreads can indicate confidence in economic activity.
The cash burn rate for Plug Power has been pretty high over the last 8 years. CAPEX really turned higher in 2016, indicating large spending in plant and equipment. Net operating cash flows have been trending lower, but looks to have stabilized the past three years. The question is if Plug can start generating free cash flow in the next five plus years.
One of the things that Plug will have to start getting better at is asset turnover which is the efficiency of the Company in generating revenues from its assets. It’s total asset turnover is 0.3x. It’s a laggard compared to the sector average of 0.82x, but the same compared to Ballard. Sales growth will be key for improving this metric over time.
I don’t think there’s anything mysterious about Plug Power as a company. Often times with emerging technology companies, we have suspicions about whether the company is just hype or if there’s real hope. This isn’t like Nikola. With Plug you’ve got actual products on the market.
I’m a believer in the long-term prospects of Plug, but there are some things to watch out for. It’s highly leveraged and while there is tremendous growth potential for hydrogen, there’s also a lot of uncertainty with the global economy. It’ll be interesting to see how Plug performs over the next five years – by any measure, it’s richly valued. But it looks like that Plug could be a beneficiary of the same momentum that’s carried Tesla (NASDAQ: TSLA) to great heights.