What’s next for Plug Power (NASDAQ:PLUG) stock? The novel coronavirus and the collapse of energy prices have taken the wind out of “green wave” stocks. But this isn’t the only issue for the hydrogen fuel cell company. Pushing the growth envelope, the company has aggressively used vendor financing, and that could create problems for it.
Just a few months ago, Plug Power’s fast and loose methods may have been worth the risk. However, today’s “new normal” may make it tougher for the company to continue on its current path much longer. Yet, despite these flaws, the fuel cell pioneer could still be on the winning side of a game-changer.
Some still expect the company to grow rapidly, even as oil prices have cratered. Indeed, companies’ desire to prove that they are environmentally friendly could trump their concerns over costs. In other words, firms’ concerns over their public image may be more important than their bottom lines when they consider powering their forklifts with hydrogen instead of fossil fuels.
Yet, given the risks, PLUG stock should be avoided, due to the many red flags in this company’s business model.
PLUG Stock and the Novel Coronavirus
Does the coronavirus change Plug Power’s outlook? As InvestorPlace columnist Vince Martin discussed in his Mar. 24 column, the outbreak will likely impact the company’s near-term growth. But management has yet to revise its 2020 guidance or its much-touted 2024 goals of $1 billion of annual gross billings and $200 million of EBITDA, excluding some items.
Granted, in hindsight today’s troubles could prove to be a mere hiccup for the company. Yet, I believe other changes could undermine the bull case on PLUG stock. Specifically, as InvestorPlace contributor Ian Bezek pointed out in his Mar. 20 column, cheap oil is bad news for green energy stocks.
But perhaps cost savings aren’t the driving factor behind the decision by Amazon (NASDAQ:AMZN), Wal-Mart (NYSE:WMT), and others to sign on as Plug Power customers. Instead, Corporate America may decide that the public relations points it can get from “going green” may be worth tens of millions of dollars. In short, cheap oil may not be that strong of a risk factor for Plug Power.
The coronavirus pandemic and cheap oil may not do serious direct damage to PLUG stock. But the recessionary environment resulting from the outbreak could accelerate the company’s existing risk factors. Among these risk factors are its aggressive vendor financing and its continued dilution of its shareholders.
Vendor Financing and Dilution Remain Red Flags
Recent developments may or may not be bad news for PLUG stock. But its prior negative catalysts — vendor financing and dilution — could accelerate as the nation’s economic growth crashes. As I discussed back in February, the company’s use of expanded lease financing is troubling.
In short, Plug Power is taking on excessive risk in order to increase its sales. The company is basically serving as a financing company for its customers.
Spruce Point Management (which is shorting PLUG stock) sees this as key to the bear case on the company’s shares. That’s because, as the company stretches its balance sheet thin, it will need to sell more shares of its stock to keep its growth going.
That brings us to the second red flag: shareholder dilution through the sale of new shares. This has already been a problem for the company. It has previously issued warrants to its big customers like Amazon. Also, the company sold 40 million shares of its stock last November to fund its growth.
You can argue that the sale of the stock has provided it with enough cash to ride out the coronavirus crisis. But issuing more share reduces the potential gains of Plug Power stock.
With these factors in mind, it’s tough to be confident in Plug Power’s prospects. But it may be just as risky to short the shares at this point in time. If the markets continue to rebound from the coronavirus selloff and low oil prices don’t materially affect the company’s sales, the shares may rise above $5 per share again.
Further, nearly one-third of the stock’s outstanding float has been sold short. A breadcrumb of good news could result in a massive short squeeze, causing the stock to rally.
Plug Power Remains a Sell (But Be Careful)
“Story stocks” like Plug Power work like a charm in bull markets. But, as markets attempt to rebound from their recent selloff, high-risk names such as Plug Power may not provide investors with good opportunities. Since the underlying economy is no longer firing on all cylinders, the company’s fast and loose financing tactics could hurt it.
Even if the company’s financing sources stay in place, additional stock sales may be needed to keep its growth on track. Although Plug Power could use these methods to meet its 2024 goals, the sales of new shares may result in gains that are less impressive than anticipated.
The bottom Line is that investors should sell PLUG stock.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.