Plug Power at tipping point; it’s make-or-break time for hydrogen

Key Points

• Plug Power tanks after missing top and bottom line consensus figures. 
• Force Majeure events led to the underproduction of hydrogen. 
• Short interest may drive the market down further, but a capitulation is underway. 

The underlying theme of the Plug Power NASDAQ: PLUG narrative has always been a quest to ramp up the production of green hydrogen to meet the growing demand and leverage revenue growth to profitability. While that narrative remains unchanged, the company struggles to cross the critical threshold, raising whether it can.

The government recently awarded $7 billion in grants to bolster the US hydrogen infrastructure and stocks, and even that event was not enough to offset weakness in Q3 results. The takeaway is that Plug Power remains on track to meet its production and manufacturing goals. Still, capitalization is an issue that will weigh on this market for the foreseeable future. 

The outlook for green hydrogen is robust, so Plug Power will likely work through these issues. The global hydrogen market was valued at $142 billion in 2022, growing at a 5% CAGR, with green hydrogen only 3% of the market. Green hydrogen production, led by Plug Power, is expected to ramp at a 40% CAGR over the next decade to overtake the market.

Based on factors such as demand for Nikola’s hydrogen fuel cell long-haul truck and other hybrid offerings, demand growth for hydrogen could exceed the current forecasts… if only they can make enough hydrogen.

Plug Power ramping production, margin expansion is happening

Plug Power had a solid quarter despite weakness in the top and bottom line results. The revenue grew by 5.4% to $198.71 million but missed the Marketbeat.com consensus estimate by 1000 basis points on a shortfall in fuel sales. The fuel sales are running below expected capacity due to Force Majeure events that have caused a chain reaction to lower deliveries, fewer service calls, and a slowdown in the deployment cycle. 

Margins were also negatively impacted by less-than-expected fuel sales. The company’s loss more than doubled because of the issue, but there are signs of improvement. The company is working to increase production and expects the Georgia facility to be at total capacity by year-end.

 Additionally, the Texas facility is also on track to reach full production in 2024, and facilities in Louisiana and New York are also progressing and expected to improve margins over the next 4 quarters significantly. Manufacturing is also gaining traction, with electrolyzer sales up 3X sequentially, growth in the liquefaction business, and power production on track to ramp. 

Plug Power needs cash, burning capital to make green hydrogen

The biggest takeaway for investors from the Q3 report is the need for cash. The company says it will need additional capital and is investigating 3 avenues, including corporate debt, government loans, and new partners. All options come with disadvantages, along with the additional debt, that will impact operations. While corporate debt is least constricting, it comes with the highest cost. The Department of Energy's green energy loans are the cheapest but have the tightest restrictions. Partnerships may be the best bet, but will dilute shareholder value. 

The analysts' activity may decide the next move for this market. Marketbeat.com isn’t picking up any new coverage or revisions in the first 12 hours following the release, so there is still an opportunity for them to move the market. Until they begin to issue revisions, the consensus sentiment is a Moderate Buy with a minimum price target of $7.50, nearly double the post-release price action. 

Shares of Plug Power fell more than 30% to a new low following the Q3 release. This is largely due to the short interest running above 25% at the last report. However, the large move may be capitulation in a beaten-down market, so there is a chance for a rebound at the open. In that event, Plug Power is likely at its bottom, but the volatility will persist until more evidence of traction in the hydrogen production and sales market.