Plug Power: Shaky Business Model, First-Mover Advantage Is A Myth

Seeking Alpha2021-12-17

Summary The more PLUG sells, the more it burns cash, raising profitability concerns. Hydrogen is a commodity with thin margins, lowering PLUG's commercial appeal. The company is overvalued based on ...

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LEEQF
2021-12-17
LEEQF
Hi! Can help like this comment?
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These revenue trends will likely continue, but I don't see this creating value for shareholders. Competitive dynamics force PLUG to sell its products at thin margins, and in many cases, below cost. \nPLUG utilizes a 200 years old technology, lacking a competitive edge or industrial moat. Despite that, its market cap is equivalent to BAE Systems (OTCPK:BAESF), Europe's largest defense contractor and a pillar of global security. Warren Buffett's test for assessing an investment rationale is to ask if you'd be willing to buy the entire company if given the opportunity instead of its shares. In this case, the question is, if you had $20 billion, would you choose to own the co-developer of the F-35 fighter jets or a fuel cell \"FC\" company using the same battery you built in science class while in middle school? Given its low, competitive moat, thin margins, and high price multiples, I believe PLUG will struggle to provide sustainable capital gains to shareholders.\nCompetitive Moat\nThere is absolutely nothing that PLUG does that General Electric (GE), Honeywell (HON), or Siemens (OTCPK:SIEGY) can't do. PLUG's flagship product is a fuel cell battery relying on a decades-long technology that remained largely the same. It is fair to say that PLUG lacks a competitive moat, and for regulatory purposes, the company discloses this notion in its annual report.\n\n We believe that neither we nor our competitors can achieve a significant proprietary position on the basic technologies currently used in PEM fuel cell systems - PLUG Annual Report\n\nThe main problem with FC is running costs. The system is fragile, and corrosion of the battery means the FC stack needs to be changed often. Hydrogen is also expensive, more than electricity and fossil fuels. What PLUG and other hydrogen companies do, in varying degrees of success, is to find ways to lower these costs. There is some value in the know-how PLUG accumulated as a \"leading\" hydrogen company. For the sake of objectivity, one must acknowledge that there might be some intellectual property value in PLUG's product designs. However, I don't see its engineering prowess anywhere close to industrial giants, or enough to meet customers' expectations.\nMargins\nFC has to compete with electric and combustion engines. I don't think the science behind FC allows it to be less expensive than solar or wind, which saw rapid tech advancement that reduced costs significantly over the past years. The steps of producing hydrogen carry multiple energy conversion stages, leading to wasted energy, which lowers efficiency. Most stationary FC that PLUG makes have internal converters that transform natural gas to hydrogen to power the FC, making Gas Turbines directly utilizing natural gas more efficient.\nThe same goes for Green hydrogen, which uses renewable energy to provide electricity to power an electrolyzer, producing the hydrogen used to fuel an FC to produce electricity. Again, multiple conversion processes lead to wasted energy that results in inefficiency. This might be the reason why Elon Musk described FC as \"Mind Bogglingly Stupid.\"\nThe science of FC also makes it impossible for it to compete on price. For this reason, it is common for hydrogen companies to sell their products at a loss, hoping to find other ways to make a profit, such as maintenance, services, orfueling. Last quarter, PLUG waived the conditions on its Amazon (AMZN) share warrants, which it handed to the company in return for GenDrive contracts. As share prices rose, AMZN warrants' costs exceeded revenue, creating a rare situation where revenue is negative. Take a look at PLUGs gross margins below.\nData by YCharts\nFinancial Position\nPLUG management capitalized on the meme stock bonanza, raising a significant amount of cash. Overnight, the company turned from a penny stock on the blink of bankruptcy to a multibillion-dollar company with a market cap comparable to top aerospace and defense manufacturers. PLUG ended the quarter with $3.4 billion in cash and a TTM cash burn of $350 million. I believe that the company will increase its cash burn as it expands operations, reaching $1 billion in the first half of 2023, before raising additional capital.\nData by YCharts\nRevenue Trends\nPLUG's main product line is GenDrive, its forklift FC engine, which saw rapid expansion in recent years. However, because of the fragility of the FC system, most PLUG clients opt for turn-key package deals that include fueling, maintenance, and in many cases, productivity warranties. These covenants extend to other product lines, including its stationary FC, marketed as GenSure, and have in the past restricted profitability. Now, with its coffins full, it has the luxury to choose the most profitable projects with less restrictive covenants. Strategically, the company will focus on Green Hydrogen production and electrolyzer sales in the short and medium run, and less on GenDrive, and GenSure (stationary FC), both of which face profitability issues.\nOn the positive side, because of the turn-key offerings, PLUG became the world's largest consumer and distributor of hydrogen. The natural trajectory was for the company to expand into hydrogen production, specifically green hydrogen, produced from renewables, and this is why it acquired United Hydrogen and Frames Group.\nI do not doubt that PLUG will increase its revenues in the next several quarters. It expanded its technical war chest through acquisition, and this, combined with a hot electrolyzer market, will create revenue tailwinds. However, the industrial sector is characterized by thin margins, which is further constricted by competitive dynamics in the case of PLUG. The shares are fueled by speculative momentum, as demonstrated by today's premarket's reaction on the news PLUG signed a deal with Edison Motors to develop FC-fueled busses, despite GenDrive being its least profitable businessline.\nThe company is also expanding into different areas too fast, which will lead to higher cash burn and higher execution risks. Roth Capital analyst captured this sentiment during the Q3 earnings call:\n\n I would say this last year, I think, there has been more progress and more changes at Plug than the prior two decades and that is tremendous. But I have a confession, right? My head is spinning, right? I have followed this Company forever. I know a lot of your partners, a lot of the key people in the supply chain. And when I talk to investors, there's a lot of different directions they're looking and they're - people are sometimes just a little bit confused\n\nSummary\nPLUG is expanding aggressively in thin-margined markets. Hydrogen is a commodity that can be easily produced once the market becomes profitable, weakening management's arguments of \"first-mover advantage.\" The company has been locking unprofitable long-term contracts, especially within GenDrive and GenSure business lines. The company lacks the competitive moat that would justify its price multiples. Once the hydrogen economy becomes profitable, all large industrials will enter the market. I expect the company to raise more equity in 2023. Last month, it acquired Frames Group, boarding more employees, lifting operational and overhead expenses.","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":699027836,"gmtCreate":1639726346447,"gmtModify":1639726346981,"author":{"id":"3572235673675008","authorId":"3572235673675008","name":"LEEQF","avatar":"https://static.tigerbbs.com/ead66a2c538631d15658309f808c7d40","vip":1,"crmLevel":3,"crmLevelSwitch":0},"htmlText":"Hi! Can help like this comment?","listText":"Hi! Can help like this comment?","text":"Hi! Can help like this comment?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/699027836","repostId":1186509817,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":7020969,"gmtCreate":1639727149093,"gmtModify":1639727149165,"authorId":4088111569952180,"author":{"id":4088111569952180,"authorId":4088111569952180,"name":"Pita2","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":6,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":699027836,"type":1,"supId":0,"prevId":0,"content":"Ok","text":"Ok","html":"Ok"}],"langContent":"CN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":16,"commentSize":1,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.25.1","shortVersion":"4.25.1","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1186509817"}