Vanit Janthra
Investment thesis
I have previously written articles on Plug Power (NASDAQ:PLUG)and I continues to reiterate my confidence in the company after attending the Plug Symposium in-person. While Plug Power is affected by the rising rate environment as a currently unprofitable company, I think that it is difficult to time the bottom of the market and would recommend investors accumulate on weakness given the significant upside for patient investors. My investment case for Plug Power is as follows:
- Plug Power has a strong revenue growth potential, with bold mid-term to long-term revenue targets, as it works through its sales funnel and bring in customers to its hydrogen ecosystem.
- With the huge opportunity set in the hydrogen economy, Plug Power looks set to benefit from the tailwinds of increasing adoption of and utilization levels of the hydrogen economy.
- The company has a solid path for margin expansion and to reach operating profitability by 2024 as it has multiple levers to pull to achieve this.
- Increasing visibility towards profitability as it grows in scale and incorporates more automation into its processes, with the vertical integration strategy bringing in additional advantages.
Impressive revenue growth potential as 2026 target surpasses expectations
Plug Power disclosed its near-term, mid-term and long-term targets of $1.4 billion and above in 2023, $5 billion in 2026, and $20 billion in 2030. For me, I was actually positively surprised by the 2026 target as I was initially expecting that Plug Power will be guiding for $4 billion revenues by 2026 based on my own forecasts. While the 2030 targets are still too far away, I have to give it to Plug Power’s management for the bold 2030 target.
This growth will be increasingly contributed from global revenues, with 35% of its revenues being global in 2026, and up to 50% by 2030. As a result, this does imply that Plug Power sees itself increasing its addressable market further by expanding not just its applications but also its geographical areas it operates in.
The target to reach $1.4 billion implies at least 50% revenue growth from 2022 and the likely growth drivers will come from opportunities in electrolyzers, green hydrogen, material handling, stationary power and mobility segments, with the strongest momentum coming from electrolyzers.
Most investors could have implied that the target disclosed for 2023 was to instill the confidence in the near-term outlook for Plug Power after its recent revenue guidance cut for 2022. The company announced that the full year revenue guidance will be revised lower by 5% to 10% due to timing and broader supply chain issues. It was also stated that despite this, they continue to see strong demand for their business, and that the mentioned projects should still be completed by 2023.
For the recent revenue guidance revision, I am of the view that this is more of a timing and supply issue and that demand remains robust. Due to permitting delays, lack of customer readiness and some supply chain constraints on Plug Power’s front, this resulted in the relevant projects being pushed back to 2023.
That said, after the Plug Symposium and the mid-term to long-term targets set by management, I think that the bold revenue targets do imply a strong sales funnel that management is seeing and as a result, once the timing and supply issues are resolved, the long-term story and demand for Plug Power remains intact.
Path to profitability coming into sight
I think that the margin targets set in the Plug Symposium were prudent as they were in-line with the earlier targets set. The company maintained its target to reach 30% gross margins and 17% operating profits by 2026, which is the same as what was disclosed earlier.
I think that there could have been some disappointment in the margin front as there could have been some expectations of upward revisions for the margin targets given the recent Inflation Reduction Act and the benefits that Plug Power will get from that. However, I continue to think that management’s prudent approach in not revising margin targets up is the right strategy as this leaves room for beating margin expectations should the benefits from the Inflation Reduction Act offset some of the uncertainties they are seeing. These uncertainties include the cost headwinds as a result of a tight supply chain environment and given that the supply chain is currently a constraint to the business, I take the view that the prudent approach to margins is warranted.
I think that the path to profitability is becoming more visible. The management expects that they are able to reach breakeven on operating margins towards the end of 2023 as its key initiatives continue to help drive margin expansion across service, hydrogen fuel and PPA, which all have clear ways to be improved, in my view. Management continues to reiterate that fuel cell and electrolyzer costs should continue to be reduced by 25% for each doubling of units, while vertical integration will bring scale benefits as the company is able to leverage on its own core capabilities to reduce costs.
Green Hydrogen
As mentioned earlier, there were some near-term production delays for green hydrogen production as a result of certain constraints, but management continues to reiterate their mid-term to long-term view of the business.
Plug Power continues to be confident that it will be able to commission 200 TPD by 2023 as it has clear visibility on this in the near-term. In the mid-term, it expects to reach 500 TPD of production by 2025 and 1000 TPD globally by 2028. These are once again huge targets set by management and the fuel and cryo business should generate $285 million revenues in 2023 and this is expected by management to scale to $3.9 billion by 2030. This translates to 20% of 2030 revenues.
Management reiterated that they expect breakeven operating margins for the fuel business by the end of 2023 and eventually, this should reach 30% margins. For me, I will continue to look for updates on their new plants in the next few quarters to see if management is executing according to plan.
Growing electrolyzer business
Management shared that the electrolyzer sales funnel increased to $25 billion, up from the initial $15 billion as of 2Q22 earnings. In addition, management expects that 2026 electrolyzer revenues will come in at $1.45 billion or 30% of 2026 revenues and this could increase to $7.3 billion by 2030, representing 20 GW of installed capacity.
As a result of the large scale that the company is targeting, this will make cost improvements significant as the business continues to scale up. Apart from cost improvements from scaling up the business, the team looks to optimize the plant and improve design to drive further cost reductions.
Growing a robust material handling customer base
While there might be some slowdowns or delays at pedestal customers like Walmart (WMT) and Amazon (AMZN), Plug Power is intent on building a robust and diversified customer base for its material handling business. Even as some of its pedestal customers may face some weakness today, it is still growing its customer list for the material handling business to continue to grow the business for the long-term. Some names that Plug Power is working with includes Grainger (GWW), Lidl and ASDA, amongst others.
In addition, management states that they are able to double the addressable market by providing these material handling customers with hydrogen infrastructure.
I think that Plug Power’s move to increase the customer list and diversify its customer base will ensure that the business becomes more resilient in periods of demand weakness from any one of its customers. In the long-term, management sees that the material handling business will make up around 15% to 20% of its revenues.
Valuation
My 1-year target price is based on an equal weight of the DCF method as well as 2025F EV/EBITDA method. For the 2025F EV/EBITDA method, I apply a 30x EV/EBITDA to 2025F EBITDA and a discount rate of 16% was applied. For my DCF, my main assumptions include the discount rate of 16% as well as a terminal multiple of 20x. I continue to think that Plug Power should trade at a premium valuation over other hydrogen peers as they have a clear strategy, continues to execute well in different segments and attracting a large group of customers. It continues to have a long runway for growth while setting itself for profitability.
As a result, my 1-year target price for Plug Power is $33.10, implying 109% upside from current levels. The company currently trades at 4.7x EV/Sales based on 2023F sales, while growing at a CAGR of 50% over the next 3-year period.
Risks
Execution risk
As I have highlighted in the article, the company has ambitious and bold near-term, mid-term and long-term targets both on the revenue and margins front. If there are signs that management is not executing well towards that target, there is a risk that management may lose confidence from the markets in its ability to meet these targets. As such, there are huge execution risks as Plug Power attempts to continue to grow strongly with margin expansion in mind.
Margins and cash flow risks
Plug Power has not achieved profitability although there are concrete targets and steps it is taking to attempt to reach its profitability goal. If management were to fall short on margins or cash flow expectations, this could bring risks to the business given that the business needs to show the ability to eventually be generating positive margins and cash flows.
Risk-off sentiment drives multiple re-rating
Plug Power has been part of the global stocks sell off that has impacted unprofitable stocks more. Given that Plug Power is currently part of the unprofitable companies group, the company has seen a multiple compression as investors risk appetite is reduced. There is a risk that this might continue, which will affect Plug Power’s valuation.
Competition
Plug Power has certain advantages, like its early mover advantage and vertical integration. However, as governments around the world provide more incentives for new energy initiatives like green hydrogen, there will be more competition as more new entrants come into the industry and may compete meaningfully with Plug Power.
Conclusion
My conviction for Plug Power has increased after personally attending the Plug Symposium. Management set ambitious mid-term and long-term revenue targets that signal to the market its strong sales pipeline, while the near-term revenue targets help to assure investors that the near-term hiccups were as a result of a difficult supply chain and timing issues. Profitability is also coming into sight as management has set targets for reaching breakeven on operating margins and reiterates their long-term gross margins and operating margin targets. Plug Power continues to grow its material handling business as it attracts more customers and is increasing the diversification of its customer base. As I have mentioned earlier, it is difficult to time the bottom for the market given that Plug Power has been affected by the sell-off for unprofitable stocks in the rising rates environment. I think that Plug Power is a core holding for any investor interested to participate in the upside from the hydrogen economy. My 1-year target price for Plug Power is $33.10, implying 109% upside from current levels.
Be the first to comment