FSUMF - Plug Power: Same Old Story In 2023

Summary

• Plug Power started 2023 by again cutting revenue targets for 2022.
• The green hydrogen company has elevated costs and future revenue backlog far below the 2023 guidance level.
• The stock remains a Sell, even with the dip below $15.

Plug Power ( PLUG ) has started 2023 off the same way the company ended prior years. The green hydrogen company spent January busily cutting revenue guidance, cancelling a big deal with a partner and announcing another deal. My investment thesis remains Bearish on the stock due to a constant overpromising and underdelivering record while burning tons of cash on excessive spending.

More Delays, Cancellations

In no huge surprise, Plug Power lowered 2022 financial targets yet again with the business update in January. The company will now report actual Q4'22 financials on March 1 after the market closes.

Back on January 25, Plug Power guided to 2022 revenue growth of up to 50%, down from the original expectations for greater than 80% growth this year. The consensus analyst estimate is now for revenues only reaching $756 million this year for just above 50% growth.

Only back in October with less than 3 months left in the year, management guided to 2022 revenues of only $821 to $867 million after previously forecasting sales top $900 million for the year. A big part of the issue is that several electrolyzer projects were pushed into 2023.

The big problem is that Plug Power didn't pull away from being overly promotional. The management team kept massive growth targets with 2023 revenues forecast to grow at over 80% (sound familiar?) and a massive jump by 2026 to $5 billion.

Plug Power provides a prime example of why the company hitting financial targets is so crucial. Per the company, the quarterly revenue must top $600 million for Plug Power to generate a 20% gross margin for breakeven income.

While the company forecasts quarterly revenues quickly topping those breakeven targets, Plug Power only produced around $270 million in Q4'22 revenues. The green hydrogen company continues to report strong growth, but all of the delayed projects come at a huge cost.

In addition, Plug Power still only listed $931 million in estimated future revenue, or backlog back when reporting Q3'22 numbers. A large portion of this revenue, such as Purchase Power Agreements, is forecast to be recognized over a five to seven year period placing the total backlog for the next year probably below $600 million and far from the revenue target of $1.4 billion.

Somehow, Plug Power forecasts operating expenses of $476 million in 2023 only growing to $650 million in 2026 during a period in which revenues surge $3.6 billion. The numbers just aren't practical that this company will generate so much leverage in the system when hitting financial targets are so difficult.

A prime example of this issue was the cancellation of the deal to build an electrolyzer manufacturing plant in Australia with Fortescue Metals ( FSUMF ). While the Plug Power CEO cancelled the agreement on economics, one has to realize the company spent the last 15+ months working on this planned joint venture to build a Gigafactory in Australia. Now, Plug Power has to presumably start over from scratch with the original plan relying on Fortescue for the advanced manufacturing capabilities while the suggestion now is that the Australian company wants to build their own electrolyzers while also buying some from Plug Power.

Either way, the deal shaked out, the ramifications are that Plug wasted over a year of costs and delays on a partnership where the manufacturing partner will ultimately build their own hydrogen infrastructure in a sign of the lack of proprietary technology. The Fortescue CEO on a call even suggested Plug Power failed to have flexibility to adjust to the market and to build stuff "on time".

Hidden Costs

In order to become very profitable, Plug Power has to remove these hidden costs. The company likely spent millions on the above deal with Fortescue to only see the plans crumble in the end.

In order to be profitable, Plug Power has to constrain SG&A spending and this is virtually impossible when working on so many deals that don't come to fruition. The company rakes up a ton of costs for projects that don't lead to revenues.

For Q3'22, the company spent $114 million on operating expenses for a quarter where sales were only $189 million. Plug Power only predicts a 20% to 30% gross margin and the business is far from a scenario where revenues will produce these margins to cover these high costs.

A key focus on the Q4'22 earnings report should be around whether Plug Power can constrain costs. The company will report higher revenues in the December quarter, but costs are likely to surge along with the increase in revenues.

Takeaway

The key investor takeaway is that investors should continue avoiding Plug Power, even with the stock now trading below $15. The stock can always spike higher based on irrational hype due to the focus on green hydrogen, but investors should sell into these rallies. Until the company is far better at hitting top-line targets, Plug Power will always struggle to become highly profitable with elevated spending never matching the reduced revenue levels. In addition, the company forecasts such low gross margins as to offer limited flexibility in missing targets.

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