Plug Power Is A Strong Buy As The Number Of Hydrogen-Powered Vehicles Looks Poised To Surge

Summary:

• Recent news suggests that the number of hydrogen vehicles will grow significantly, boosting Plug Power’s electrolyzer and hydrogen fuel businesses in the long term.
• Accelerating e-commerce growth positively impacts Plug Power’s material-handling business, enhancing its revenue potential.
• Plug Power expects to receive a large federal loan, enabling it to build multiple hydrogen plants in the U.S.
• These hydrogen plants will capitalize on the anticipated surge in U.S. hydrogen demand, driving long-term growth for Plug Power.

Since I wrote my last, bullish article on Plug Power (NASDAQ:PLUG), I’ve seen several additional news items which strongly indicate that the number of hydrogen vehicles in the U.S. and overseas is likely to increase a great deal over the long term. As a result of this information, I think that Plug’s electrolyzer and hydrogen fuel businesses are likely to grow considerably over the long term.

Also importantly, recent developments indicate that the growth of e-commerce is accelerating. The latter development is positive for Plug’s substantial material-handling business.

Meanwhile, the company recently reiterated that it expects to receive a large loan from the U.S. federal government. This loan will enable the firm to benefit meaningfully from the major increases in hydrogen demand in America that I expect to materialize in the long term.

Recent Indications That Hydrogen Vehicles Will Proliferate in America and Elsewhere

As I noted in a recent, previous article on Nikola (NKLA), “research firm Frost & Sullivan reported that the demand for hydrogen-powered trucks, also generally known as fuel cell electric vehicles, was rising.” And the firm, which expects hydrogen trucks to specialize in transporting heavy loads over long distances, “predicts that over 3.336 million hydrogen-powered heavy-duty and medium-duty trucks will be in operation in North America by 2035.”

Moreover, German truck parts maker Bosch recently estimated that “hydrogen-powered vehicles” will take a 3% share of the global market for newly registered commercial vehicles heavier than six tonnes by 2030, ramping up to 10% by 2035.” Using the latter figures, I estimated that 11,400 hydrogen-powered trucks could be sold in the U.S. in 2030 and about 38,000 may be delivered in 2035.

Further, BMW (OTCPK:BMWYY) and Toyota (TM) recently announced that they would collaborate to develop “a new generation of fuel-cell powertrains.” And BMW plans to launch a car powered by hydrogen by 2028. Logically, Toyota would probably not be spending the time and money to partner with BMW on the development of fuel cell powertrains unless it, too, plans to unveil hydrogen-powered cars at some point. Indeed, Toyota is reportedly also interested in partnering with Hyundai on hydrogen vehicles.

Meanwhile, Hyvia, Plug’s Europe-based joint venture with Renault, recently launched a prototype of a new hydrogen-powered van called the Renault Master. The vehicle, which will be supported by “a network of H2 stations being rolled out across Europe,” will have a very high range of 700 kilometers or nearly 435 miles and a refueling time of just five minutes. It’s expected to be marketed starting at the end of 2025.

Finally, in South Korea, where Plug has formed a joint venture with a subsidiary of South Korean conglomerate SK Group, 1,185 hydrogen-powered buses are being utilized, and the Asian country intends to increase that total to 21,200 by 2030. Additionally, Hyundai is producing” the world’s first series-production heavy-duty hydrogen fuel cell truck” and hydrogen buses at a plant in the country. It can now manufacture over 3,000 buses annually at the factory and plans to start producing new hydrogen buses at the plant by 2027.

And supporting my thesis that increased utilization of hydrogen will result in stronger demand for Plug’s electrolyzers, one research firm recently estimated that the U.S. electrolyzer market would grow at a very impressive compound annual growth rate of 23.8% between 2023 and 2033. By 2033, the firm estimates that the market will be worth roughly over $790 million.

Increased Utilization of Hydrogen Vehicles Will Boost Plug’s Electrolyzer, Fuel Businesses

With a large number of hydrogen vehicles likely to be launched in the U.S. and elsewhere, a huge amount of hydrogen will have to be produced to fuel those vehicles. The latter situation should make it relatively easy for Plug to sell its electrolyzers which are used to produce green hydrogen. In a Sept. 10 presentation, Jose Luis Crespo, Plug’s General Manager of Applications, said that the firm expects electrolyzers to be its “major source of growth for the next five years or so.”

Indeed, when it comes to marketing these electrolyzers, the company is already having a significant amount of success. As I noted in my previous article on Plug, the firm “generated $15 million in revenue from electrolyzers last quarter, up from nearly $7 million during the same period a year earlier.” What’s more, as I also noted in the prior column, the firm deployed $70 million of electrolyzers in Q2. It wasn’t able to recognize much of the revenue from those electrolyzers because it could not meet all the requirements to do so. But Crespo stated that the firm would recognize all of the revenue in the second half of 2024.

And very impressively, Plug is providing “basic engineering design packages” for 7.5 gigawatts of hydrogen production. In other words, Plug is designing future hydrogen plants of other companies that could generate up to 7.5 gigawatts of hydrogen. If companies representing just 25% of those gigawatts decide to order products from Plug, the deals would generate over $1 billion of revenue for the firm “in the next couple of years,” Crespo reported.

On the fuel production side, two of the company’s U.S. plants, in Georgia and Tennessee, are already producing green hydrogen. A third factory in Louisiana, which is a joint venture with Olin Corporation (OLN), is expected to launch in Q4. Plug has stated that it intends to build six more clean hydrogen facilities using a $1.66 billion loan from the Department of Energy. Crespo reported that the firm expects the loan to be disbursed by the end of this year.

As of the end of 2023, the firm intended to produce green hydrogen at two more factories, in Texas and New York, by the end of 2025. In May, it was reported that the company would try to finish building the Texas plant by the end of next year. Plug is currently producing 25 tons per day of green hydrogen, and it expects Louisiana to generate an additional 15 tons of the fuel by the end of 2024.

Plug has also noted that, as a result of the green hydrogen tax credit, it can sell green hydrogen at a significant, positive gross margin. And with many hydrogen trucks looking set to be deployed by 2030, it will likely have no problem selling all of the fuel that it can produce.

Analyst Raises Target Price and Plug Announces Electrolyzer Deal With Major Companies

On Aug. 25, eight days after my previous article was published, investment bank BTIG raised its price target on PLUG stock to $5, more than double the current share price. After meeting with Crespo, the bank reported that the demand for the company’s fuel cells used in stationary power and material handling is increasing.

The latter point supports my thesis on the acceleration of e-commerce increasing the demand for Plug’s material handling fuel cells. Moreover, BTIG also noted that the supply of hydrogen is unable to keep up with the demand for the fuel. That statement backs my thesis about Plug benefiting from strong demand for the green hydrogen that it is producing. BTIG kept a buy rating on the shares.

And on Sept. 18, Plug won a deal to supply 25 megawatts of electrolyzers to a major oil company, BP (BP), which is entering the hydrogen space and its partner, Spanish utility and renewables giant Iberdrola (OTCPK:IBDRY). The latter company reports that it has over 40,000 employees.

Ultimately, the project, which will be developed in phases, may produce up to 2 gigawatts of electricity, Plug reported. Therefore, Plug can potentially sell many more electrolyzers in the future for this project.

Further, BP plans to ramp up its production of low-carbon hydrogen tremendously. Consequently, the deal announced on Sept. 18 may open the door for Plug to sell many more electrolyzers to BP over the long term. And Iberdrola is planning to build at least one other green hydrogen plant and considering building multiple, other such factories. Therefore, Plug can also sell many more electrolyzers to the Spanish firm over the longer term.

Positive Signs in the E-Commerce Space

There are multiple indications that the growth of e-commerce in the U.S. is accelerating. The latter development should be positive for Plug’s material=handling business, since its fuel cells are used in warehouses which in which products are stored by e-commerce companies. Additionally, four of its largest customers—Amazon (AMZN), FedEx (FDX), Home Depot (HD), and Walmart (WMT) — are extensively involved in e-commerce.

Speaking of FedEx, the company reported on its fiscal Q1 earnings call, held on Sept. 19, that “e-commerce is resetting and starting to grow again.” Moreover, Adobe (ADBE) recently stated that it expects U.S. online sales to jump a strong 8.4% year-over-year during the holiday shopping season, way up from the 4.9% increase seen in 2023.

Last quarter, Plug’s sales of fuel cell systems, which includes the products used to power material handling products, sank to $13.15 million, from $72.18 million during the same period a year earlier With e-commerce making a comeback in the U.S., I expect the company’s sales of fuel cell systems to also surge going forward.

Risks and Valuation

Plug Power may not be able to obtain the $1.66 billion loan from the Department of Energy, hindering its ability to exploit the likely, large demand for hydrogen in the longer term. Another company could develop much more efficient electrolyzers than Plug, causing the latter firm’s electrolyzer business to struggle.

The company burned $149 million of cash last year, and it had only $62.4 million of cash and short-term investments as of the end of Q2. Thus, it could go bankrupt. But since the Street has shown a large appetite for buying PLUG stock recently, and it had only $80 million of current debt as of the end of Q2 while it is slated to receive the huge loan from Washington, I don’t expect that scenario to unfold.

Plug is changing hands at a forward price-to-sales ratio of two times. While that’s meaningfully above the sector average of 1.5 times, I believe that the company’s valuation is attractive, given its huge, future opportunities. Indeed, analysts, on average, expect its revenue to surge to $1.78 billion in 2026 from $839 million in 2024. Additionally, PLUG stock has a forward price-to-book ratio of 0.55 times, well below the sector average of 2.86 times.

The Bottom Line on PLUG Stock

Given the company’s impressive long-term growth outlook, I believe that PLUG stock is a good choice for all risk-tolerant, long-term growth investors.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of PLUG,AMZN 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.

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