The problems that have plagued Plug Power (PLUG -1.01%) persisted in its second quarter as the company once again posted poor results. The stock has lost about 80% of its value in the past year.
Let’s take a closer look at the issues the company is facing and whether it has an opportunity to stage a turnaround.
Plug Power’s problems
The biggest issues facing Plug Power are negative gross margins and cash outflows. The company found a niche selling fuel cells used in forklifts and other material handling equipment to high-volume warehouses. However, in conjunction with these deals, it has long sold the hydrogen fuel needed to power these devices at a loss.
That trend continued in its most recent quarter, with the company reporting a gross loss of $131.3 million. That was worse than the $78.1 million gross loss it posted a year ago, but an improvement from the gross loss of $159.1 million it recorded in the first quarter.
For the second time this year, in addition to negative fuel gross margins, it also had negative equipment gross margins. On the bright side, its negative fuel gross margins did see some improvement stemming from the green hydrogen production facilities that the company has built.
Building out hydrogen product plants in order to supply its customers with hydrogen fuel is a big part of its plan to try to get to positive gross fuel margins. Increased production from its Georgia facility, along with some price increases, helped fuel the improvement. Meanwhile, it’s anticipating that a new hydrogen plant it is building in Louisiana in a joint venture with Olin will begin producing hydrogen in the fourth quarter.
Given that the company has been selling both its equipment and its fuel at lower prices than it costs to produce them, Plug Power has continued to pile up losses and burn through cash. In the quarter, the company posted a loss of $262.3 million, or $0.36 a share. Meanwhile, it had operating cash outflows of $254.7 million, while its free cash flow was negative $350 million.
Looking at Plug Power’s balance sheet, the company has $214 million in debt against $62.4 million in cash. It also has $956.6 million in restricted cash. Its restricted cash is largely from previous sale/leaseback agreements that will be released over the lease term, and to a lesser extent, letters of credit backed by security deposits.
Given the lack of available cash on its balance sheet, the company has been aggressively selling shares to help fund its operations and the continued buildout of its hydrogen plants. In the quarter, it’s received net proceeds of $266.8 million from equity sales and $572.1 million through the first half of the year.
To put Plug Power’s cash burn and equity raises in perspective, the company only has a market cap of around $1.8 billion based on its most recent share count.
Image source: Getty Images.
Are Plug Power’s problems fixable?
It’s possible that the company can fix its problems, but it’s getting less and less likely that it will happen. First, its core fuel cell business has been performing poorly. With all of Plug Power’s issues, it’s almost easy to miss that its equipment sales plunged nearly 65% year over year in Q2, and this was while it was being sold at a loss. But even when it was selling more equipment last year, its equipment gross margins were still only just above 13%.
The company is waiting on a potential $1.66 billion low-interest loan from the Department of Energy to help fund the rest of its hydrogen plant buildout, although the loan has been challenged by U.S. Sen. John Barrasso (R-Wyo.), a ranking member of the Senate Committee on Energy and Natural Resources. Without the loan, the company could be hard-pressed to find additional financing given the current state of its business.
Meanwhile, while hydrogen fuel gross margins have improved, the likelihood of fuel sales being a strong profit driver seems unlikely. Getting fuel margins to breakeven would be an accomplishment, but that alone does not solve the company’s problems.
It’s worth noting that if Plug Power were to grow its business to $1.5 billion a year in revenue with 25% overall gross margins, the $375 million in gross profit would still not cover the approximately $400 million in corporate costs that it is on pace for this year. The company is projecting revenue of between $825 million to $925 million this year. This just demonstrates how far from profitability it is. Meanwhile, Plug Power will continue to dilute shareholders and burn through cash while it tries to implement a turnaround.
While there are some bright spots, such as improved hydrogen fuel margins and electrolyzer sales, the company still has a long climb ahead. As such, I would stay away from the stock right now.
