A Member of Pat McKeough’s Inner Circle recently asked for his analysis of a penny stock in the developing field of fuel-cell technology.
Plug Power develops and makes both hydrogen cells and fuel cells. It has enjoyed some initial success with its GenKey system, which can replace lead-acid batteries in industrial vehicles. The company has also developed a new platform for on-road vehicles. While Plug Power’s revenue rose in the last quarter, it continues to lose money, says Pat. Fuel-cell technology faces a number of barriers to commercialization, he adds, and Plug Power needs big revenue growth to justify its high market cap.
Q: Pat, what do you think about hydrogen fuel cells in general, and Plug Power, in particular?
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A: PLUG POWER (symbol PLUG on Nasdaq; www.plugpower.com) designs, develops and makes both hydrogen cells and fuel cells.
A fuel cell is a device that combines hydrogen and oxygen (from the air), to produce electrical power without combustion. The hydrogen is often derived from a fuel such as natural gas, propane or methanol. Alternatively, it can be obtained from the electrolysis of water, stored hydrogen or a hydrogen pipeline. Using these cells to generate electricity originated with the NASA space program.
So far, Plug Power’s major successes have come in the material-handling industry through the sale of its GenKey system. Its GenKey hydrogen- and fuel-cell products replace lead-acid batteries to run electricity-powered industrial vehicles. They include lift trucks.
Extending its reach to on-road electric vehicles, Plug Power has developed its ProGen platform of modular fuel-cell engines. The company reports that thousands of its engines are in operation today, supporting what it believes are some of the most rugged operations in the world.
Penny stocks: Revenues rise in latest quarter, but cash flow is negative
Plug Power’s revenue has increased steadily over the last five years, up 288.3% from $26.6 million in 2013 to $103.3 million in 2017. It has lost money every year. Losses have widened from $65.9 million in 2013 to $127.1 million for 2017.
For the three months ended June 30, 2018, overall revenues jumped 76.6%, to $39.9 million from $22.6 million a year earlier. Plug Power lost $18.0 million, or $0.08 a share, compared to a loss of $21.8 million, or $0.10. Cash flow was also negative. The company has long-term debt of $75.1 million, or a low 18% of its market cap; Plug Power holds $15.0 million, or $0.07 a share, in cash.
Despite its promise, fuel cell technology faces a number of barriers to its commercialization: cheaper fossil fuels, such as natural gas and propane; consumer perceptions of the system’s safety risk; regulatory requirements; and the potential development of newer, more-competitive technologies and products. There is also the difficulty of manufacturing these systems on a large-scale commercial basis.
Plug Power is still a long way from showing a profit. As well, its market capitalization of $414.5 million (shares outstanding times the current share price) reflects high, and perhaps unrealistic, expectations for future revenue.
Recommendation in Stock Pickers Digest: We don’t recommend Plug Power. It is okay to hold only for highly aggressive investors who want exposure to fuel-cell technology.
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