Is There Still Time to Short Plug Power?
Plug Power (PLUG) has declined considerably since I first covered the stock. The stock has plunged over 40% in the last two months alone, and while the stock may appear “cheap”, I expect this trend to continue. The two primary reasons why I think Plug Power will soon be a penny stock are the flaws of fuel cell technology and the company’s business model.
Plug Power has been destroying shareholder value, many years by initiating secondary offerings and has burned through that cash.
When a company is selling products at a loss, it is very easy to have a large customer base. Plug Power has gained many clients like Wal-Mart and Home Depot by selling their products at a loss, and this has deceived investors into believing that the company’s technology will be worth billions in the future. Firms like Wal-Mart have high pricing power and given that Plug Power is a niche supplier, it will be very difficult for Plug Power to increase the cost of its products to make a profit. Although the company’s gross profit margin has improved from -25% to -7%, I still think the company is a long way away from breaking even.
In addition, the fuel-cell technology has many flaws that will prevent its widespread deployment in the near future. Things like high manufacturing price, difficulty in storage, and high infrastructure cost are major headwinds for fuel cell technology. Thus, it isn’t surprising that Elon Musk, Tesla CEO, called the concept of fuel-cell cars “mind-bogglingly stupid.” It’s clear that a technology with so many flaws will not be useful for years, if not decades.
You’d think that a company with so many will be priced conservatively, but Plug Power is overvalued no matter how you look at it. Plug Power has a P/S ratio of 4.25 and is yet to report a profit. The company has guided for revenues of $100 million for FY2015, however given the history of Plug’s CEO Andy Marsh, I wouldn’t be surprised if the company misses on its guidance once again. Thus, paying a hefty premium for a loss making company with numerous headwinds and ineffective technology doesn’t make sense to me.
Given Plug Power’s history of failing to deliver on its promises and resorting to secondary offerings to raise funds, I’m still confident that the stock will fall further. Plug’s business model is not strong enough to support its high valuation. And given that it isn’t expected to report a profit in the next four quarters, I think the company will continue operating at a loss and will soon run out of money. Thus considering the negatives, I think Plug Power is a good short candidate.