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Plug Power (NASDAQ:PLUG) has had a year of hope, and then hopes dashed, so that its year-on-year performance is down 22.5%. In the past month its share price rose above $30 briefly and it now trades at $22.13, down 21.4% for the month. To address the question in the title to this article, the share price needs to more than double to reach $50. For those who casually follow the incredible hype about hydrogen, one would think that PLUG should easily pass $50 in the coming 12 months because it is a household name in the hydrogen story. Certainly Wall Street Analysts seem to think so, with 14 strong buys, six buys and six holds out of 26 Analyst coverages in the past 90 days. Five Seeking Alpha authors in the last 90 days are similarly optimistic, with one strong buy, two buys and two hold treatments. My take is that the hydrogen story is not as certain as the breathless headlines indicate. Here I give my take on the prospects for Plug Power. There are deals with big companies, but a substantial business isn’t obvious at this stage.
Plug Power provided a 13 page shareholder letter that covered a huge number of deals, but other than trying to convince me that the company has all bases covered and is the only real player on top of the industry, I came away without a sense of overall corporate purpose nor how the business is going to become successful. Hydrogen is hard because there are so many hidden agendas and so much hype, Government largesse, and suspension of reality. Deals are important, but there needs to be a substantial business opportunity that can be grasped to describe what makes Plug Power investable.
Some things are clear. For example, Plug Power has a fuel cell product that is suited to small applications like forklifts and light vehicles. Perhaps recognising the problem of fueling its fuel cell products, PLUG is now seeking to deliver not only the hydrogen powered systems, but also a green hydrogen supply chain. The question is whether it can deliver on these promises. Unlike some emerging businesses, like for example, Enphase (ENPH), which have identified a powerful suite of products in the clean energy sector and are getting on with growing a profitable business, PLUG has worked hard on big name partnerships to help drive its share price and the prominence of its business. The question is one of details. For example will building hydrogen infrastructure and partnerships on fuel cell powered fork lift trucks, and potentially in the light commercial vehicle sector, deliver profitable business outcomes. At the end of the day a company needs profitable products and services.
I’m a big fan of earnings transcripts because they give investors a sense of how senior management views the company and what occupies their attention. For me as an investor this influences how I think about potential investments. It has stood me in good stead for various investments in solar (e.g., Enphase, SunPower (SPWR), First Solar (FSLR)), wind power (e.g., Vestas Wind Systems (OTCPK:VWDRY)) and electric car makers (e.g., BYD Group (OTCPK:BYDDF)). In all of these companies I’ve been impressed with the quality of management and how they are approaching growing their businesses. By investing early in these companies I’m a happy investor and I remain invested because these companies have a future in my opinion.
If you accept the hype about hydrogen, this is a huge emerging opportunity and Plug Power is a prominent company in the space that is well funded. So I tackled PLUG’s recent Q4 2021 earnings transcript expecting to see lots of interesting stuff.
CEO Andy Marsh opened with the usual hydrogen hype … A $10 trillion opportunity and up to 20% of the world’s energy to come from hydrogen … and PLUG, doubling revenue over the past 12 months, being well positioned with first mover advantage and partnerships with big companies involving fuel cell forklifts (e.g., Walmart) and the South Korean market through SK Technologies. Marsh went on to emphasise the need for a green hydrogen network and to claim that PLUG is building the first green hydrogen network in the US with plans for 500 tons/day by 2025 and to duplicate the US story to develop a global network. He gave the example of a 50:50 JV with Spanish infrastructure and renewable energy company Acciona (OTCPK:ACXIF), to develop and operate hydrogen projects throughout Spain and Portugal. The plan is to produce more than 100 tons of green hydrogen daily in Spain and Portugal. PLUG claims to have built more fuel cells than anyone.
The introduction was a great high-level pitch and I expected to get a more detailed picture of a series of tangible projects to flesh things out. Except that Andy Marsh was finished after this very, very, high-level pitch and he just said … “we are now ready to take your questions”. I confess that I’ve never seen a quarterly transcript like this. My immediate thought was, but where is the detail to base questions on?
What followed was equally extraordinary. It was bit like a religious convention, with only converts participating.
The first question was about new green hydrogen production facilities and offtake agreements. I provide the answer from Chief Strategy Officer Sanjay Shrestha in full to indicate the nature of the discussion:
“Good. So let me first talk about the plans, right? So again, as we said, we plan to have three plants built in 2022. And we said that we were actually looking to break grounds on many more this year, right? So that actually gives you basically a network here in North America by the end of 2023 and early 2024.
And as it relates to actually our offtake agreements for this green hydrogen, first off, we talked about this a little bit in our shareholder letter. Our funnel right now, the sales funnel for that is about 600 tons per day, right? It comes from a variety of different markets, mobility market, industrial application and natural gas blending. And our goal here, as Andy talked about it before, is to secure about 200 tonnes per offtake. So you absolutely should be expecting to hear more about it as we go into Q2 of this year in terms of new announcement and signing of these deals.”
Perhaps this works for you, but for me I had no sense of any reality in that answer. I expect to hear about real projects not high-level hype.
Some questioners tried to get some idea of what the business priorities are. There were no answers that I could make sense of. All high-level stuff, with more and more developments which naturally(?) will mean better margins and of course new customers, but no detail at all about any of this. Once green hydrogen becomes ubiquitous it seemed assumed that there will be a step change in PLUG’s margins, without ever giving an indication of what the actual margins are.
It was clear from a questioner that a 1000 ton/day green hydrogen pipeline has been discussed. The answer started to talk about 600 tons/day and ended up talking about 200 tons/day as the goal. I had no sense of any reality about where demand for 1000, 600 or even 200 tons of green hydrogen/day might come from. There did seem to be talk about substituting green hydrogen for gray hydrogen, but there was no sense of how realistic that opportunity is, nor what the gray hydrogen is used for. I had the sinking feeling that this is about spiking natural gas pipelines with green hydrogen to keep natural gas alive.
There is a lot more in a very extended Q&A section and readers who are serious about investing in PLUG might find a full read is useful. It might give a sense of what you are investing in and how management is approaching the business development. The challenge is to try to get a sense of what is real and what is just hydrogen hype. I confess to be quite unclear about these distinctions.
If PLUG’s stock price is tracked, one sees rapid share price climbs on news, closely followed by loss of the gains. This is a day-trader response to news, without a commitment to the stock for the long haul. To take a specific point, a problem I have is getting a clear picture of what the opportunity in the forklift area is for fuel cell vehicles.
Forklift trucks are ubiquitous vehicles that often operate in closed areas and hence there are occupational safety issues about them being powered by ICE (Internal Combustion Engine) due to emissions. Nevertheless ICE-powered forklifts comprised 57% of a $45 billion market in 2019, with electric vehicles being 43% of the fleet. By 2027 the global market for forklifts is expected to be $81 billion. This is a big opportunity, but there are a lot of players. A subset of the electric market involves fuel cell powered electric vehicles. This is where Plug Power has chosen to be a significant player, although other fuel cell manufacturers (e.g., Toyota (TM)) are players.
There is a lot to unpick in relation to forklift trucks. For example, motorised transport is facing the end of the ICE era. The above report assumes that ICE-powered forklift trucks will dominate in 2027, but is that going to be how this plays out?
Then there is the market for lithium battery-powered forklifts. Like any emerging technology area, it isn’t just about your new technology (e.g., fuel cell) versus the past (ICE). In the forklift space my impression is that fuel cell is a niche application (probably due to difficulty in accessing hydrogen or its cost). A significant recent article barely mentioned fuel cells and the discussion was focused on new generation lead acid batteries versus lithium batteries. Toyota is a major player in both lithium-ion battery and fuel cell-powered forklift trucks. One report suggests that fuel cells only complete when more than 90 fuel cell forklifts operate in one location due to investment required to enter hydrogen/fuel cell technology.
On April 19 Plug announced a major deal (but an option not an agreement) to supply green hydrogen for material handling lift trucks in Walmart’s (WMT) distribution and fulfillment centers in the US. The release talked about scale up of a 50-vehicle fleet in 2012 to expand to a fleet of 9,500 and growing. This is puzzling because a report in 2020 indicated at that time that Walmart was already operating 10,000 Plug Power fuel cell forklifts. The option in the new announcement is to deliver up to 20 tons/day of liquid green hydrogen (which could fuel up to 25,000 forklifts), but no timetable is given for this level of consumption by Walmart or indeed whether Plug can supply 20 tons/day. The press release from Plug talks about it producing 70 tons/day green hydrogen by end of 2022, 500 tons/day in North America by 2025 and 1,000 tons/day globally by 2028.
I’d feel a lot more confident about the recent release about Walmart if there was clarity about an order, not just an option, and some indication as to what has happened with the partnership since 2012. How big is the fuel cell forklift fleet at Walmart today? Some indication of the financial terms would also be helpful.
Plug has been involved with fuel cell powered forklifts for some time, with an agreement with Amazon (AMZN) in 2017 with revenue for Plug expected to be $70 million in 2017. The 2017 agreement involved Amazon acquiring warrants to acquire 55,286,696 PLUG shares @ $1.1893/share. The warrants would vest upon substantial purchase ($600 million aggregate) by Amazon of PLUG technology. A recent project with Amazon in Spokane Valley, Washington was related to fuel cell manufacture.
Walmart and Amazon are major customers and they have the scale to be able to address sourcing hydrogen. I wonder about the situation for most of the forklift industry. Presumably for most forklift owners sourcing hydrogen would be a major barrier to switching to fuel cell powered vehicles. There was some reference to this issue in the Q4 Q&A but I couldn’t get a clear understanding as to exactly what PLUG is doing about capturing business beyond the big outfits.
Another major partnership is one with Renault Group. This takes the form of the HYVIA JV which is dedicated to hydrogen mobility. A plant has been constructed in Flins France. It is beginning to construct fuel cell modules based on PLUG’s technology. The plan is by the end of 2022 to have 1000 units/year construction capacity. A 30-kW fuel cell will power Renault’s Master H2-TECH portfolio (Van, Chassis Cab, City Bus). By the end of 2022 H2 refueling stations will begin to be assembled and a 1 MW (450kg hydrogen/day) low carbon electrolyzer will be manufactured to test fuel cells and H2 refueling. There has been some press of a fuel cell version of the Renault Master Van last year and at the Q&A in the Q4 2021 transcript mention was made of HYVIA manufacturing 250 Master Van fuel cell vehicles this year. The expectation is for 250,000 Master Vans/year by 2030. It would be good to have a sense of the plans for between 250 and 250,000 vehicles between now and 2030.
Such is the weirdness of the hydrogen story that the latest I found on Renault’s hydrogen adventure is that they may be about to unveil a hydrogen powered combustion car (not fuel cell powered)!
The HYVIA JV certainly has a physical reality in France, but time will tell where it is headed. Renault in the meantime seems very serious about battery electric cars, so I’m not sure where the fuel cell plans sit within the Group.
I’ve given just a couple of concrete examples of areas that PLUG is focusing on. There is an almost endless list of other less well-defined business opportunities.
The key takeaway from the hydrogen industry in general, and PLUG Power in particular, invariably has sentiment along the lines of “…Plug Power offers tremendous long-term upside once green hydrogen becomes an accepted part of the energy transition”. My question is about where green hydrogen is going to land. Missing in almost all discussion is where green hydrogen will fit in the competitive landscape and in particular what advantages it has over electrification (especially of transport) and energy management through batteries, time shifting, demand management etc. Green hydrogen is an energy storage and transport system, in the same way that electricity and batteries are. Much of the commentary conflates the need to reduce emissions with adoption of green hydrogen, with little if any comparison with competing technologies. Be careful about how new technology proponents position their technology because they might just be ignoring the new technology, in for example transport (Battery Electric Vehicles), that transcends both the old (ICE) and the niche new (fuel cells)?
Plug Power’s story has been a roller coaster ride of share price surge on optimism about the energy transition, followed by pullback. The difference between PLUG and renewable energy stocks is that while solar PV, wind power and batteries are on very strong growth trajectories, Plug Power keeps promising big breakthroughs and partnerships with major companies that seem not to happen or don’t have a clear market. Does it have too many things started and not enough being commercialised?
Until there is more tangible evidence for Plug’s business opportunity, I doubt a doubling of the PLUG share price is coming any time soon.
I am not a financial advisor but I follow closely the different elements of the massive changes in energy and transport as the world begins to decarbonize. I hope my comments on Plug Power and the potential hydrogen industry help you and your financial advisor begin to make sense of the investment opportunities in hydrogen.
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Disclosure: I/we have a beneficial long position in the shares of BYDDF ENPH SPWR FSLR VWDRY 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.