Plug Power: High Cash Burn Rate And Extremely Poor Margins (NASDAQ:PLUG)

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While investing in a company’s future prospects due to a specific technology it has or a specific sector's projected growth is smart in my opinion, I also believe the company needs to show some fundamental strength first. While Plug Power Inc. (NASDAQ: PLUG) is growing its revenues and has a strong balance sheet, its cost of revenue has been growing at a faster rate than its revenue, which led its gross margin to reach -30% in Q2 2023 while burning more than $625 million in the first half of 2023. While green hydrogen might be the future of energy, I don’t think Power Plug is a good investment in this sector at its current state which is why I’m giving it a sell rating.

Hydrogen is seeing a huge push from governments and politicians since they believe it is the key to the 2050 carbon neutrality deadline. Currently, 98% of hydrogen is produced from fossil fuels and only 2% from electrolysis. Furthermore, producing hydrogen from electrolysis has an efficiency of 70% and converting hydrogen to power again brings the efficiency down to around 50%. Also, green hydrogen is 3 - 4 times more expensive than gray hydrogen.

Using hydrogen in high concentrations could also lead to safety hazards since it is highly explosive and using a hydrogen/natural gas mix wouldn’t reduce emissions by much. For example, using a 20% hydrogen to 80% natural gas mix only provides a mere 7% reduction in emissions.

While problems like cost and efficiency can be solved in the coming years, they are currently limiting the use of green hydrogen. That said, I believe hydrogen still has a future as an energy storage for inconsistent renewable energy like solar energy where efficiency wouldn’t matter as much since there’s no alternative currently.

Plug Power has continued its impressive revenue growth and achieved $260 million, a 72% increase over the $151 million it achieved in Q2 2022. That said, its net loss has increased from $152 million to $234 million due to its cost of revenue increasing from $182 million to $338 million, an 85% increase YoY. This means that the company’s cost of revenue growth is outpacing its revenue growth. This also isn’t a one-time thing as it has been suffering from declining gross margins for four straight quarters now.

Quarter

Revenue

Cost of Revenue

Gross Profit

Gross Margin

Q2 2022

$151.0

$182.0

-$31.0

-20.53%

Q3 2022

$188.6

$229.0

-$40.4

-21.42%

Q4 2022

$220.7

$283.0

-$62.3

-28.23%

Q1 2023

$210.3

$273.0

-$62.7

-29.81%

Q2 2023

$260.0

$338.0

-$78.0

-30.00%

In addition to the declining gross margin, Plug Power burned through $625 million in the first half of 2023, which is more than a 55% increase from the $400 million it used in the first half of 2022. Since the company currently has $1.5 billion in liquidity, this means that if it continues burning cash at the same rate, it will need to raise capital by Q3 2023, especially since it is yet to finalize the Department of Energy’s (DOE) $1 billion loan.

Plug Power expects to reach $5 billion in annual sales while achieving 30% gross margin and 17% operating income.

Plug Power 2026 forecast, Q2 earnings presentation

But I don’t believe the company will achieve these numbers since it requires a CAGR of around 60% while also improving its abysmal gross margins and generating operating income, which doesn’t seem realistic.

Since Plug Power has a relatively strong balance sheet and is expected to further strengthen it with the $1 billion loan from the DOE, it can choose to slow down its growth to decrease its cost of revenue and improve its gross margin and its cash burn rate. That said, since management forecasts its CAGR to be around 60% for the next few years, I don’t think the company will slow down its growth anytime soon.

Furthermore, if a breakthrough regarding green hydrogen production occurred and reduced its costs immensely that would lead the company to improve its margins without the need to slow down its growth by much, and it'd result in a wider adoption of green hydrogen as a clean energy source.

TradingView Chart

Looking at the daily chart, Plug Power is in a neutral trend with the stock trading in a sideways channel between $10.30 and $13.27. As for the indicators, the stock is trading below the 21 and 200 MAs, which is a bearish indication, and is currently testing the 50 MA as a support. Meanwhile, the RSI is neutral at 42 and the MACD is bearish.

I recommend going short on Plug Power with an entry at the $10.30 resistance and taking profits at $9.04 and $7.50 near its 52-week low, with a stop loss at $10.84 if it breaks the $10.30 resistance.

I think green hydrogen still has a long way to go before we can rely on it as a main energy source due to its low efficiency and its high cost. Despite Plug Power growing its revenues at an impressive rate, its cost of revenue is outpacing this growth which led its gross margins to decline substantially. Moreover, the company suffers from a high cash burn rate that may force it to raise capital as soon as next year in case it doesn’t close the DOE’s $1 billion loan. While the company may become a leader in the green hydrogen space, it still needs to show a lot of improvements first which is why I’m giving Plug Power stock a sell rating.

This article was written by

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