Plug Power’s Strategy Looks Poised To Bear Fruit
Contributor since 2014 / 270 Followers
Summary:
- Plug Power’s strategy of profiting from the strong demand for green hydrogen is likely to succeed in the long term.
- The firm should eventually generate positive gross margins from its fuel sales while also benefiting from the rapidly rising sales of its electrolyzers which are used to manufacture green hydrogen.
- Plug is building new green hydrogen plants which will allow it to meet the rising demand for the fuel.
Hiroshi Watanabe
Plug Power Inc.‘s (NASDAQ:PLUG) strategy of eventually becoming profitable by selling large amounts of green hydrogen fuel and electrolyzers which are used to generate green hydrogen looks poised to succeed over the long term. Consequently, I recommend that patient investors buy PLUG stock.
More specifically, Plug has said that existing tax credits will allow it to profitably sell green hydrogen, and recent developments suggest that this assertion will prove to be correct.
Meanwhile, there are multiple signs that the demand for green hydrogen in the U.S. and globally will indeed be huge, causing the company’s electrolyzer business to continue to expand rapidly. And by building several additional green hydrogen factories with the help of a huge U.S. government loan, Plug Power should be able to ramp up its production of the fuel relatively quickly, enabling it to supply huge amounts of the fuel to the many companies that will likely be looking to buy it.
Positive Gross Margins for Fuel Sales
Plug’s CFO, Paul Middleton, reported in March that the company can produce green hydrogen for $4 to $5 per kilogram and sell it for $6 to $7 per kilogram. Further, a new production tax credit for green hydrogen will lower the company’s cost per kilogram by up to $3 per kilogram, the CFO reported. (For the second quarter, the company recognized a tax credit of $2.60 per kilogram for the green hydrogen produced at its Georgia plant).
Late in 2023 and early in 2024, Plug’s CEO, Andy Marsh, had expressed a great deal of disappointment with the rules issued by the Biden administration on the tax. The CEO told Bloomberg that the rules would reduce hydrogen production by 70% by 2030, indicating that the regulations would make it very tough for companies to obtain the credit while generating profits. Indeed, multiple other hydrogen producers complained about the very strict rules that the Treasury Department was forcing them to follow in order to obtain the credits.
Importantly, however, Marsh expressed a great deal of confidence on the company’s second-quarter earnings call, held on Aug. 8, that the Treasury Department would make the regulations around the credit much less harsh. “I think it’s really clear that the regulations on the three pillars are going to become much looser,” the CEO reported, adding that he “would not be surprised” if announcements about such changes would be made after the Democratic National Convention and after the U.S. elections.
Meanwhile, Plug is making a great deal of progress in narrowing its gross margin losses on its fuel sales. Specifically, its gross margin loss on such sales and related equipment dropped from 220% in Q1 to 95% in Q2. The company has explained that it can generate positive gross margins from selling green hydrogen in the future, and it has made a great deal of progress toward reaching that goal. Moreover, it is expressing a great deal of confidence in the rules surrounding the tax credit becoming less onerous for green hydrogen. Consequently, I believe that it will be able to easily take those tax credits, increasing its gross margins on its fuel sales further.
Finally, as the firm produces and sells much more green hydrogen, its gross margin on these sales is likely to rise, becoming positive over the longer term. Given these points, I expect the company’s fuel sales to become profitable over the longer term.
Signs of Strong Demand for Green Hydrogen
Nikola Corporation (NKLA), which has made a deal to buy green hydrogen from Plug Power, reported that it had delivered 72 hydrogen trucks to retailers last quarter. The news indicates that there’s significant demand for hydrogen trucks in America.
Meanwhile, multiple, huge companies, including Exxon Mobil Corporation (XOM), Chevron Corporation (XOM), and Air Products and Chemicals, Inc. (APD), a leading industrial gas producer, are building one or more low-carbon hydrogen plants in North America. It’s difficult to believe that these companies would be launching expensive hydrogen production plants if they did not know that there would be significant demand for the fuel that they would produce.
Additionally, Plug generated $15 million in revenue from electrolyzers last quarter, up from nearly $7 million during the same period a year earlier. And the firm noted that it was unable to recognize most of an additional $70 million of revenue from electrolyzers that are in the final stages of being commissioned.
Also, remarkably, Plug expects to generate a huge $320 million of revenue from selling electrolyzers over the next one to two years. And in the next year, it anticipates generating nearly $72 million in sales from selling “cryogenic equipment and other.” Cryogenic equipment is used to cool hydrogen so that it can be more easily transported and stored. Presumably, the “other” referenced by the firm involves additional equipment that’s used to store and transport hydrogen.
Finally, Marsh has also said that the company could start selling backup power systems to data centers in late 2025, while the firm is working with a number of companies, including Airbus SE (OTCPK:EADSY) and Delta Air Lines, Inc. (DAL), that could eventually use its hydrogen to power planes.
In light of all of these developments, I believe that the demand for green hydrogen will be very strong going forward, enabling Plug to sell a great deal of its green hydrogen.
Moreover, the large demand for green hydrogen will lead to many companies producing and transporting huge amounts of the fuel, enabling Plug to generate a great deal of revenue and profits from selling its equipment used to create and transport green hydrogen.
More Green Hydrogen Plants
Plug, in partnership with chemical producer Olin Corporation (OLN) intends to launch another green hydrogen plant in Louisiana by the end of this year. Subsequently, with the help of a $1.6 billion loan from the Department of Energy, the firm intends to open two more plants, which it will solely control, in Texas and New York. The Department of Energy has conditionally approved the loan. These new plants will help Plug meet the rising demand for green hydrogen while further raising its gross margins.
Risks, Valuation, and the Bottom Line on Plug
Plug Power may not be able to obtain its loan from the federal government. Such a development would likely not allow it to complete its plants in Texas and New York, and its profits from selling green hydrogen would be much less than I expect at this point. Additionally, the demand for green hydrogen may not be as strong as I expect it to be.
Such a development would cause Plug’s revenue and profits from green hydrogen and its electrolyzers and cryogenic equipment to be way below my expectations. Finally, the Treasury Department may not relax the rules related to the hydrogen tax credit. Such a development would likely greatly reduce the amount of hydrogen produced in the U.S., greatly weighing on Plug’s equipment sales.
On the valuation front, I believe that Plug’s revenue could easily double between 2025 and 2027. Analysts, on average, expect its revenue to come in at $1.25 billion next year. If my thesis proves to be correct, its revenue would be $2.5 billion in 2027. The shares’ current market capitalization is $1.85 billion, so the shares are changing hands at about 0.75 times my 2027 revenue estimate for the company. That, in my view, is a very attractive valuation.
Plug Power is well-positioned to generate positive gross margins from its green hydrogen. There’s a great deal of evidence that there will be strong demand for the fuel, enabling Plug to sell large amounts of it. Additionally, the company’s electrolyzer and cryogenic equipment businesses are poised to grow rapidly, given the company’s projections and the many firms preparing to produce green hydrogen.
Given these points, I expect Plug’s financial results to improve tremendously over the long term, and I expect PLUG stock to outperform the market in the long term.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PLUG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.