Plug Power Inc. (PLUG, Financial), a leading provider of hydrogen solutions, has the bold vision to build a global green hydrogen economy. There is only one problem; its shares have tanked more than 50% in the past year.
Year to date, the stock has recorded losses of nearly 40%.
Further, there are several main risks and challenges that could prevent the company from achieving profitability soon.
Plug Power announced its first-quarter results on May 9. Investors, however, did not appear to be impressed as the stock lost 19% for the week ended May 11. Was the drop justified? I argue that it was as there were no changes in major key financial metrics and both net income and free cash flow were negative.
Earnings takeaways
Plug Power reported $210.30 million in revenue, which grew 49% year over year, reaffirmed its 2023 targets and said it remains focused on key initiatives that will help it achieve revenue growth and find its path to profitability. However, the gross loss reported was $69.3 million, while the operating loss was $209.79 million and net loss was $206.56 million. All three figures widened year over year, meaning the company performed worse than in prior-year periods.
The company saw retained earnings of -$3.12 billion for 2022, compared to -$2.4 billion in 2021, and is accumulating higher deficits. This is very negative, reflecting a weak and highly unprofitable business system.
It also recorded a weighted average number of common shares outstanding of 589,205,165 for the first quarter compared to 577,866,983 in the same period last year. This implies potential stock dilution, which is negative as it reduces the book value of the shares, but it is a smart way to reduce the net loss per share by dividing the total net loss by a higher number of shares. In other words, Plug Power without the stock dilution would have reported a higher negative earnings per share figure than the basic and diluted loss of 35 cents for the first quarter of 2023.
Why Plug Power is losing money
Plug Power has experienced losses due to a combination of factors related to its business model and market dynamics.
First, there are high research and development costs as Plug Power invests heavily to innovate and improve its fuel cell technology. These costs can be significant, especially in an emerging and rapidly evolving industry like hydrogen fuel cells.
There are also additional expenses like manufacturing and production costs. Developing and scaling up the manufacturing capabilities for fuel cell systems can be expensive. As Plug Power expands its operations and increases production volumes, it incurs costs associated with manufacturing, supply chain management and quality control. Hydrogen fuel cell technology requires a substantial initial investment in infrastructure, including hydrogen production, storage and distribution facilities. Building and maintaining this infrastructure can be costly, especially in the early development stages.
Plug Power has to invest heavily to gain market adoption and build its sustainable growth. The market for hydrogen fuel cells is still in its nascent stage, with limited adoption compared to other energy sources. The relatively low demand and competition from alternative technologies can make it challenging for Plug Power to achieve profitability in the short term. While the company has been successful in securing partnerships and collaborations with major companies, it takes time for these partnerships to translate into significant revenue growth. Additionally, the competitive landscape and pricing pressures may impact its ability to generate substantial revenue.
It is important to note that losses are not uncommon for companies in emerging industries or those focused on research and development. Plug Power's financial performance can vary over time as market conditions evolve and the adoption of hydrogen fuel cell technology increases. Investors should keep track of the company's financial reports, market trends and industry developments to assess its long-term prospects.
What are the main challenges now?
Plug Power faces several challenges in its pursuit of commercializing and expanding the use of hydrogen fuel cell technology.
Some of the main challenges include cost competitiveness and infrastructure development. Hydrogen fuel cell systems are generally more expensive than traditional power sources like internal combustion engines or batteries. Plug Power needs to continue working on reducing the cost of its fuel cell systems to make them more competitive in the market. The widespread adoption of hydrogen fuel cell technology requires the development of a robust hydrogen infrastructure, including production, storage and distribution facilities. Building this infrastructure is a significant challenge as it requires substantial investments and coordination among various stakeholders.
Then there are issues related to supply chain and raw materials, market acceptance and regulatory and environmental aspects. The availability and cost of raw materials necessary to produce fuel cells, such as platinum and other catalysts, can impact Plug Power's manufacturing costs and scalability. Ensuring a reliable supply chain and exploring alternative materials are essential for overcoming this challenge. While the potential of hydrogen fuel cell technology is significant, it is still a relatively new and emerging field. Plug Power needs to educate customers, industries and policymakers about the benefits and feasibility of hydrogen as an energy source to drive market acceptance and adoption. The regulatory framework and government policies play a crucial role in shaping the adoption of hydrogen fuel cell technology. Plug Power must navigate complex regulation, secure favorable policies and advocate for supportive measures to create an enabling environment for its business.
Lastly, the competition between other companies in the hydrogen economy is too important. The hydrogen fuel cell industry is becoming increasingly competitive, with several companies entering the market and developing their own technologies. Plug Power needs to stay innovative, differentiate itself and maintain a competitive edge in terms of product performance, reliability and cost-effectiveness.
It is important to note these challenges are not unique to Plug Power, but are inherent to the development and commercialization of any new technology in the energy sector. Plug Power's success in addressing these challenges will impact its long-term prospects and investment potential. Based on the financial performance over the past year and the most recent quarterly report, Plug Power is not an attractive opportunity now.
