Plug Power: Time to Go Long
Plug Power (PLUG) has made an impressive comeback on the stock market in the past month with its shares gaining almost 37%. This has brought some amount of relief to investors who have seen a massive drop in the company’s market capitalization in the past year. Now, the recent surge in Plug Power’s shares can be attributed to the company’s increasing traction in the end market, rapid growth in the recent quarter with a terrific earnings beat, and the huge addressable opportunity going forward.
Let’s take a look at the reasons why investors can look for more upside in Plug Power going forward.
The addressable opportunity is huge
Plug Power provides fuel cell technology, and this is a market that’s growing at an impressive pace.
This is the reason why the company is seeing a consistent expansion of its new products and markets for stationary power. More specifically, in the near term, Plug Power will see an increase in its addressable market in both North America and on a global basis. For instance, its addressable market will grow at a CAGR of 21.5% for the next four years in North America. Also, its GenKey market opportunity is slated to increase at a CAGR of 6.3% a year through 2018.
Now, the good thing is that Plug Power is already gaining traction in the end market as it has built up a strong customer base.
Gaining traction in the end market
Recently, Home Depot opened a new distribution warehouse in Toledo, Ohio. This new distribution warehouse is being powered by Plug Power’s GenDrive fuel cells, with the retailer using the GenKey solution at the warehouse. This will help Plug Power enhance productivity and remove the usage of lead-acid batteries for Home Depot.
All in all, Home Depot’s decision of moving from lead-acid batteries to Plug Power's hydrogen fuel cells will help it save more than 800 tons of greenhouse gas carbon dioxide emissions on an annual basis. In the long run, these savings might go up to 9,000 tons of carbon dioxide. This can be compared to the removal of approximately 1,800 cars from the road.
In my opinion, this decision of saving greenhouse gases by Home Depot provides an opportunity for Plug Power to maximize its revenue going forward for two reasons. First, since Home Depot has over 70 distribution facilities in North America and more than 2,000 stores in the United States, Plug Power will gradually see an increase in its addressable market going forward as more stores and facilities use Plug Power’s powered forklifts.
Next, as the U.S. government looks to reduce greenhouse gas emissions, Plug Power will continue gaining more traction. For instance, a couple of months ago, President Obama imposed rules on power plants in order to cut greenhouse gas emissions in the U.S. to the tune of 32% by 2030 as compared to 2005. As the U.S. tries to cut greenhouse gas emissions in order to reduce the impact on the climate, Plug Power should see an increase in the addressable opportunity in the long run.
Focus on margin augmentation through operational improvements
Plug Power is working on a number of strategies to improve operational efficiency. For instance, it is focusing on improving its purchasing power from suppliers, simplify designs, and increase the scale of its manufacturing to augment the margin of its GenDrive solutions. Additionally, Plug Power has redeveloped its Class-2 and Class-3 fuel-cell products. Looking ahead, Plug Power anticipates shipping a higher mix of its class 3 products with the air-cooled stack in the second half of 2015. Also, it intends to ship liquid-cooled stacks as well in its Class-2 truck units later this year.
Now, these air-cooled cater to applications that require less than 5kW of output, while the liquid-cooled stacks address power requirements of more than 5kW. Thus, Plug Power is doing the right thing by coming out with different products to suit different requirements as this will help end users adjust their costs accordingly.
In addition, Plug Power is busy constructing over 15 GenFuel hydrogen infrastructure points. It will help the company in selling additional GenDrive units as more infrastructures comes into place and encourages more companies to adopt its solutions.
Moreover, the redevelopment of its class 2 and class 3 products will lead to a drop in its product costs substantially, since the company has deployed air-cooled stacks with improved efficiency. Also, it has reduced its service costs by reducing the breakdown rate of its GenDrive units by an impressive 70%, which will again aid margin growth. On the other hand, since the company has increased the life of its new fuel cell stacks to the tune of 40%, its efficiency has improved further.
Thus, Plug Power’s products might see an increase in adoption going forward as the company has made its products more efficient, which will ultimately lead to a drop in costs and increase efficiency.
Driven by the strong end-market opportunity, better infrastructure, and more efficient products, Plug Power will see an improvement in its financial performance going forward. In fact, the company is already growing at a solid pace, with its revenue up 39% last quarter. Moreover, Plug Power aims to achieve $200 million in backlog this year, which is more than double the revenue it has generated in the trailing twelve months.
Finally, the company has a strong balance sheet with $109 million in cash and just $2.6 million of debt. This means that it can continue with its product development moves without any hindrance, and can even take on more debt in order to finance its growth. Thus, in light of the points discussed above, I think that Plug Power is a good long-term opportunity and it can sustain its newly-found momentum.