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The investment case for green hydrogen and Plug Power (NASDAQ:PLUG) is becoming increasingly convincing. 2022 will be a pivotal year for Plug as it continues to execute well on its mid and long term goals. There is increasing evidence from the Ukraine Russia crisis that hydrogen is increasingly a viable and essential energy option should the world wish to move away from reliance on fossil fuels and on Russia for energy. Furthermore, Plug Power just released 4Q21 results that beat expectations and showed that its execution and strategy remains on track to meeting its long term goals. Finally, there are many favourable policies emerging for Plug Power, not just in the US, but also globally.
I have written an initial article on Plug Power that can be found here, and a subsequent follow up article that can be found here.
Investment thesis
It is becoming increasingly clear that Plug Power has the potential to be the green hydrogen leader of the future. I continue to stand by my investment thesis and find that with its current execution as well as with increasing awareness, support and utilisation of hydrogen as a clean energy fuel, I show further conviction in my investment thesis as shown below:
I believe that Plug Power is on track to becoming the global leader and the next Tesla (TSLA) in the hydrogen space. This is due to (1) Plug Power’s technology leadership in hydrogen fuel cell systems. (2) Plug Power is vertically integrated in upstream and downstream segments of the hydrogen economy. (3) As a result, Plug Power is not just gaining interest, but also contracts from large, established customers. (4) Increasingly favourable industry and regulatory dynamics is positive for the green hydrogen industry.
Overview
For the newer readers who are unfamiliar with Plug Power, the company is a leader in supplying hydrogen fuel cell technology products as well as solutions and targets to operate globally as it continues to expand into new markets and geographies.
Plug Power is expected to see one of the strongest growth and profitability in the hydrogen space and focuses strongly on green hydrogen. Plug Power is scaling up its PEM-based technology production very rapidly and has a strategy to build up a hydrogen production network, as well as fuelling systems.
Plug Power has significant first mover advantage in multiple segments and has a vertically integrated strategy within the hydrogen space, further solidifying its market position. Plug Power is focused on a huge addressable market and thus will grow quickly in line with this nascent industry. Lastly, it is razor focused on achieving 50% revenue CAGR growth to achieve $3 billion in revenues by 2025 and EBITDA of $600 million by 2025. In my opinion, it has the necessary partnerships with large global companies like SK Group, Renault and other firms make this very achievable.
A stellar 4Q21 results
Plug Power’s 4Q21 revenues came in above my expectations and it continued to reiterate revenue guidance as well as gross margin improvement across 2022 and over the next few years. For 4Q21, Plug Power recorded revenues of $162 million that beat expectations. However, as per expectations Plug Power recorded a net loss of $0.33 per share. This was due to margins and earnings per share being impacted by the higher fuel and service costs once again, due to impact from the supply chain issues caused by covid-19. Furthermore, this was further impacted by higher natural gas prices as well. That said, management expects significant improvements in margins and profitability, especially so in 2023 and 2024, when there is more hydrogen capacity that comes online, and they also expect that service costs will continue to decline with increasing scale.
Looking deeper into expectations on cost side, management expects longer term cost reductions in cost to amount to 30% in 2022 and 45% by end of 2023 in the service segment, on a per unit basis. Furthermore, they expect there to be cost reductions in the fuel segment to amount to 50% by end of 2025 in the fuel segment, which in my view, will be key drivers of margin expansion.
Looking towards the longer term goals, Plug Power continued to reiterate its revenue outlook for 2022 with $925 million to $950 million revenues. 25% of these are likely to come from overseas markets. Furthermore, it expects 2025 revenues of $3 billion revenues, 20% EBITDA margin, and 17% operating margin.
With Plug Power’s recent 4Q21 results, I believe that the company is on track to at least meeting the baseline guidance for its stated long term 2025 targets in all of its business segments, like green hydrogen, electrolyzers, material handling, and emerging mobility and backup power applications. This is especially so with favourable policy support emerging not just in the US but also globally.
Electrolyzers
I am of the opinion that Plug Power is really well positioned in the hydrogen space for upcoming hydrogen projects, especially so in merchant electrolyzer sales. In terms of its current progress, Plug Power reaffirmed its guidance to ship 155MW of electrolyzer capacity in 2022. In addition, there is a huge backlog of at least 1GW secured by year end. I think this bodes well in terms of the evidence of huge demand for Plug Power’s electrolyzers, as its customers increasingly see the benefits and value add that comes with acquiring electrolyzers from Plug Power.
Furthermore, there is potential upside to the current expectations for electrolyzers as management continues to be upbeat and optimistic about the significant win rate of about 50% globally, as well as its sales funnel in the electrolyzer business. Further solidifying its position is the fact that Plug Power continues to make improvements to its electrolyzer products.
In addition, management has plans to be selective with the customers it chooses, prioritising the ones that have the capabilities to build a plant with clear off-take agreements as well as strong financial backing. I am of the opinion that Plug Power is in a very good position in the industry that enables it to have this sort of leverage, which is further contributed by the huge demand in electrolyzers in the coming years. It makes much more business sense at this very early stage for the electrolyzer business to focus on customers that can help it grow, and that can grow with Plug Power, and that these customers can be long term customers of the company.
Materials handling
As its main core business for some time now, Plug Power’s position in the materials handling space is well known. Despite the supply constraints that the world is facing, Plug Power continues to see its core business segment grow steadily.
Plug Power reaffirmed its guidance to recognise about $600 million in revenues for the material handling business in 2022. It also reaffirmed its goal to reach gross margin neutrality in the service segment from cost downs, improve refuelling station capacity, and add 3 new pedestal customers. Of these 3 new pedestal customers, 2 are to be from Europe, further expanding the company‘s global footprint.
For the materials handling business, I think that the company is actually not given enough credit for its ability to navigate the supply constraints in this part of the business, given that we just saw record levels of shipments in 4Q21 for the material handling business. In addition, I am of the opinion that it bodes really well for the company to be able to secure pedestal customers in Europe and depending on who these customers are, it can show that Plug Power can succeed not just in its own home turf, but also on a global scale in other international markets as well. This would mean that Plug Power’s material handling offerings are globally competitive and could continue further global expansion.
Mobility and backup power
This segment is relatively new and an up and coming segment for Plug Power, similar to how its electrolyzer business was in the past few years. In this business segment, Plug Power is developing technology for emerging opportunities with growing market sizes.
The company reaffirmed its targets to have 250,000 vehicles on the road and 30% market share by 2030, through the Renault HYVIA joint venture. Furthermore, management expects to ship 250 vehicles in 2022 to about 20 different customers and expects an even larger ramp up coming in 2023. With regards to stationary power, Plug Power reaffirmed management’s expectations to ship 1MW in projects in the second half of 2022.
Green hydrogen
Lastly, with the green hydrogen segment, Plug Power continues to ramp up production capacity and bring fuel costs down. This is the part of the business where the economics looks increasingly attractive with fossil fuel prices rising (More on this below).
Management expects Plug Power to continue to remain on track with its green hydrogen production targets and that with great execution, we could see gross margins move from the current negative margins today to about 30% by 2024.
Currently, Plug Power’s internal hydrogen demand is about 40 to 50 TPD, and the excess of that produced will be an opportunity to sell hydrogen fuel to new markets or segments.
In my view, the economics for green hydrogen becomes significantly more attractive if natural gas prices remain structurally elevated, and that natural gas prices will likely remain structurally elevated, so this could be an additional demand driver for the green hydrogen business in the future. Furthermore, I continue to have the view that there will be efficiency improvements from the liquefaction partnerships that will help to improve margins and reduce overall costs.
Rising fossil fuel costs from Russia Ukraine war
Green hydrogen has become an unexpected beneficiary to the invasion of Ukraine by Russia due to the rising energy costs from fossil fuels. It was found by BNEF that green hydrogen is now cheaper than grey hydrogen in Europe, Middle East, and China. With the move to reduce reliance on fossil fuels and away from Russia in particular, this makes green hydrogen a very viable option in this new climate. According to BNEF, the cost of producing green hydrogen in EMEA is now $4.84 to $6.68 per kg, compared to the cost of grey hydrogen of $6.71 per kg. Likewise, we see that the cost of green hydrogen is $3.22 per kg in China compared to $5.28 per kg for grey hydrogen.
I think that with Europe looking eagerly to reduce reliance on Russia imports of gas and with Russian gas imports accounting for 45% of EU’s gas imports, I am of the view that we will likely see substantially gas prices in the foreseeable future. As such, there are many companies and governments that may increasingly see green hydrogen as the new way forward to make energy security a reality.
As such, I am of the view that the shift towards green hydrogen could unexpectedly be accelerated due to the new realities globally. This is of course also echoed by Andy Marsh, CEO of Plug Power, who also sees this becoming a reality and positioning Plug Power to accelerate their deployment of green hydrogen technologies and production
Valuation
As elaborated earlier in my analysis of Plug Power’s 4Q21 results, I think one thing that has been a common theme is the very solid execution of the company across multiple high growth segments, and the management team certainly has a very big role to play in this high level of execution not seen in other companies. This is a big deal for companies like Plug Power where there is still a long runway and with huge expectations to meet long term guidance set by management. As such, I continue to believe that Plug Power should command a premium valuation to peers in the industry.
As such, with the significantly improving business fundamentals and growth profile and improving industry and governmental policy support for Plug Power’s businesses, I continue to see strong conviction in PLUG and thus, I reiterate my target price of $40.06 from my earlier article, which can be found here, implying an upside of 41% from current levels.
Plug Power is currently trading at 14.3x FY2022 EV/sales and 9.3x FY2023 EV/sales. Although Plug Power currently trades on a multiple of forward sales, I expect that Plug Power will quickly pivot towards significant profitability in 2023 to 2024, and as such with the strong earnings growth potential relative to the other players in the hydrogen space, I think that its current forward sales multiple is not unreasonable in this context.
Conclusion
The future looks really bright for Plug Power, especially with favorable policy support emerging in the both the US and globally. I continue to have believe in the company’s execution capabilities in 2022 as it will also be a critical year in Plug Power’s green hydrogen roadmap, and its path towards its 2025 goals. I think we will continue to see increasing backlog in its electrolyzer business, expansion of its customer base in material handling, and further developments in technology for its emerging businesses. I continue to have conviction that Plug Power is very well positioned currently to deliver on its current and future business opportunities, as well as drive a very significant earnings and margins expansion as it has the ability to very quickly move towards profitability over the next few years with all the levers it has to pull. I continue to believe that Plug Power will be a leader of the hydrogen market in the future and reiterate my target price of $40.06 for Plug Power, implying an upside potential of 41%.
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