Finance
The problems with Plug Power persist. Should investors throw in the towel?
The problems that have plagued Plug-in power supply (NASDAQ: PLUG) continued in the second quarter as the company again posted poor results. The stock has lost about 80% of its value in the past year.
Let’s take a closer look at what problems the company is facing and whether there is an opportunity to achieve a turnaround.
Plug Power’s problems
The biggest problems Plug Power faces are negative gross margins and cash outflows. The company found a niche in selling fuel cells used in forklifts and other material handling equipment to high-volume warehouses. Coupled with these deals, however, the company has long sold the hydrogen fuel needed to power these devices at a loss.
That trend continued in the most recent quarter, with the company reporting a gross loss of $131.3 million. That was worse than the $78.1 million gross loss it posted a year ago, but an improvement on the $159.1 million gross loss it posted in the first quarter.
For the second time this year, the company had negative equipment gross margins in addition to negative fuel margins gross margins. On the plus side, negative fuel gross margins saw some improvement due to the green hydrogen production facilities the company has built.
Building hydrogen products factories to supply its customers with hydrogen fuel is a big part of the plan to try to achieve positive gross fuel margins. Increased production from the Georgia plant, along with some price increases, contributed to the improvement. Meanwhile, the company expects to build a new hydrogen plant in Louisiana in a joint venture Olin will start producing hydrogen in the fourth quarter.
As the company has sold both its equipment and fuel at lower prices than it costs to produce it, Plug Power has continued to pile up its losses and burn its cash. In the quarter, the company posted a loss of $262.3 million, or $0.36 per share. In the meantime it was operational outgoing cash flows of $254.7 million, while free cash flow was negative $350 million.
Looking at Plug Power’s balance sheet, the company has $214 million in debt versus $62.4 million in cash. It also has $956.6 million in restricted cash. The restricted cash comes largely from prior sale/leaseback agreements that will be released during the lease term, and to a lesser extent from letters of credit backed by escrows.
Given the lack of available cash on its balance sheet, the company has been aggressively selling shares to help finance its operations and the continued buildout of its hydrogen plants. It received net proceeds of $266.8 million from stock sales in the quarter and $572.1 million in the first half of the year.
To put Plug Power’s cash burn and capital raisings into perspective, the company only has a market cap of about $1.8 billion based on the most recent share count.
Can Plug Power’s problems be solved?
It is possible that the company can solve its problems, but the chances of this happening are becoming increasingly less likely. First, the core fuel cell business is performing poorly. With all of Plug Power’s problems, it’s almost easy to miss that equipment sales fell nearly 65% year over year in the second quarter, all while selling at a loss. But even as it sold more equipment last year, gross margins on equipment were still only just over 13%.
The company is awaiting a potential $1.66 billion low-interest loan from the Department of Energy to help finance the remainder of the construction of its hydrogen plant, although the loan has been challenged by U.S. Senator John Barrasso (R-Wyo .), a ranking member of the Senate Committee on Energy and Natural Resources. Without the loan, given the current state of affairs, the company could have difficulty finding additional financing.
While hydrogen fuel gross margins have improved, fuel sales seem unlikely to be a strong profit driver. Breaking even on fuel margins would be an achievement, but that alone won’t solve the company’s problems.
It’s worth noting that if Plug Power were to grow its business to $1.5 billion annually in revenue with 25% overall gross margins, its $375 million in gross profit still wouldn’t cover the approximately $400 million in operating expenses the company is on track to do so . year. The company expects revenue of between $825 million and $925 million this year. This just shows how far away it is from profitability. Meanwhile, Plug Power will continue to dilute shareholders and burn cash as it tries to turn around.
While there are some bright spots, such as improved margins on hydrogen fuel and electrolyser sales, the company still has a long climb ahead. Therefore, I would stay away from the stock at this time.
Should you invest €1,000 in Plug Power now?
Consider the following before purchasing shares in Plug Power:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Plug Power wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $641,864!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns August 12, 2024
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.
The problems with Plug Power persist. Should investors throw in the towel? was originally published by The Motley Fool
