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For Plug Power Stock to Snag $3, It Needs More Than Amazon and Walmart

Will Ashworth

Plug Power (NASDAQ:PLUG) reported record second-quarter deployments and gross billings on August 6. PLUG stock, however, dropped on the news but has since recovered those losses.

PLUG stock has potential, but the company needs to plug into marquee deals

Source: Shutterstock

As speculative, money-losing stocks go, Plug Power stock is a pretty good one. It’s operating in an industry that will continue to get busier as the demand for alternative fuel sources rises.

In May, I suggested that if you owned PLUG stock prior to it announcing Q1 2019 earnings, and you were in it for the long haul (three to five years), I’d continue to hold. Moreover, I recommended buying some more if it dropped on the news, which it did.

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Since then, it has recovered its post-earnings losses. But despite excellent Q2 2019 results, the PLUG stock price struggles to hit $3.

If Plug Power stock wants to make it to $3 and beyond, here’s the reality: it’ll have to move beyond Amazon (NASDAQ:AMZN) and Walmart (NYSE:WMT) to do so.

On-Road Growth

Plug Power is best known as a provider of fuel-cell systems to the logistics industry. Amazon, Walmart, and many others use them in forklifts and other machinery at their e-commerce warehouses.

However, if it wants to grow to become a profitable business, it’s got to find other markets to sell its first-rate products.

As part of its Q2 press release, PLUG discussed how it had obtained its first on-road customer during the quarter. The alternative-energy company signed a deal with StreetScooter, a subsidiary of DHL.

StreetScooter will deliver 100 ProGen hydrogen fuel cell-powered trucks to be used by Deutsche Post DHL starting in 2020. It’s the first commercial-scale application of fuel-cell engine deployment for on-road logistics. The ProGen engine will go farther and be cheaper to run.

If the initial 100 do well, DHL could see as many as 500 vehicles in its fleet utilizing the ProGen system.

Now, if it can get about 100 more orders just like this one, investors won’t be talking about $3; instead, they’ll be talking about $30.

Pathway to Profitability

In 2018, Plug Power had revenue of $133 million, 55% higher than a year earlier. In 2019, it expects revenue of at least $235 million, 77% higher than in 2018.

That’s good news.

Unfortunately, its gross profit on its sales is negligible. Add in R&D and SG&A expenses and Plug Power lost $102 million on its 2018 sales. For every dollar of sales last year, it lost 77 cents.

Look more closely at its various streams of revenue: you’ll notice that except for the actual sale of its fuel-cell systems, each of its other revenue generators costs more to produce or provide than the money they bring in.

At least the sale of fuel-cell systems brought in $71.3 million in 2018. And their cost of goods was only $54.8 million, generating a gross margin of 23%.

In the first six months of 2019, Plug Power’s $40.8 million in fuel systems sales had a gross margin of 37.6%. This was considerably higher than in all of 2018.

If PLUG can keep pushing its gross margin higher on the fuel-cell systems, the largest of its revenue streams, and it can move beyond the logistics market, it’s got a legitimate shot at generating consistent profits.

The first half of 2019 could be an aberration: in the first six months of 2018, its fuel-cell systems had a gross margin of 13.4%. But if not, the company’s projection that it will deliver positive adjusted EBITDA for the entire fiscal 2019 doesn’t seem outlandish in the slightest.

The Bottom Line on PLUG Stock

As speculative plays go, Plug Power stock is an interesting one.

Its business appears to be doing better than it ever has, both operationally and financially. And yet the PLUG stock price is stuck around $2.20 a share.

Having Amazon and Walmart as a backstop is nice. However, if it really wants to take off, it has got to deliver more deals like DHL. It just has to.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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