The problems that plague us Plug-in power supply (NASDAQ: PLUG) continued in the second quarter as the company continued to post poor results. The stock has lost about 80% of its value over the past year.
Let’s take a closer look at what problems the company is facing and whether it has a chance to turn things around.
Problems with Plug Power
The biggest problems facing Plug Power are negative gross margins and cash outflows. The company has found a niche by selling fuel cells used in forklifts and other material handling equipment to high-volume warehouses. Coupled with these deals, however, the company has long sold the hydrogen fuel needed to power these devices at a loss.
That trend continued in the most recent quarter, with the company reporting a gross loss of $131.3 million. That was worse than the gross loss of $78.1 million it reported a year ago, but an improvement from the gross loss of $159.1 million it reported in the first quarter.
For the second time this year, the company had negative gross margins on equipment in addition to negative gross margins on fuel. On the positive side, the negative gross margins on fuel did see some improvement, thanks to the green hydrogen production facilities the company has built.
Building hydrogen product plants to supply its customers with hydrogen fuel is a big part of its plan to try to achieve positive gross fuel margins. Increased production at its Georgia plant, along with some price increases, helped drive the improvement. In the meantime, it expects a new hydrogen plant it is building in Louisiana in a joint venture with Olin will start producing hydrogen in the fourth quarter.
Since the company sells both its equipment and fuel at prices lower than the cost of production, Plug Power has continued to pile up losses and burn cash. In the quarter, the company posted a loss of $262.3 million, or $0.36 per share. Meanwhile, it had operating cash outflows of $254.7 million, while 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. The restricted cash largely comes from prior sale/leaseback agreements that are released during the lease term, and to a lesser extent from letters of credit that are secured by escrow funds.
Given the lack of available cash on the balance sheet, the company has been aggressively selling stock to fund its operations and the continued buildout of its hydrogen plants. It received net proceeds of $266.8 million from stock sales in the quarter, compared to $572.1 million in the first half of the year.
To put Plug Power’s cash burn and capital raisings into perspective, the company has a market cap of only about $1.8 billion based on the most recent share count.
Are Plug Power’s problems solvable?
It’s possible that the company can work through its problems, but it’s increasingly unlikely that will happen. For one thing, its core business, fuel cells, is underperforming. With all of Plug Power’s problems, it’s hard to miss that equipment sales in the second quarter were down nearly 65% year-over-year, and it was selling at a loss. But even as it sold more equipment last year, its equipment gross margins were still just above 13%.
The company is awaiting a potential $1.66 billion low-interest loan from the Department of Energy to help fund the rest of the hydrogen plant’s construction, though the loan has been challenged by U.S. Sen. John Barrasso (R-Wyo.), a ranking member of the Senate Energy and Natural Resources Committee. Without the loan, the company could struggle to find additional financing given the current state of its business.
Meanwhile, while hydrogen fuel gross margins have improved, fuel sales appear unlikely to be a strong profit driver. Breaking even on fuel margins would be an achievement, but that alone won’t 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% total gross margins, the $375 million in gross profit still wouldn’t cover the roughly $400 million in operating expenses it’s on track for this year. The company is forecasting revenue of $825 million to $925 million this year, which shows just how far it is from profitability. In the meantime, Plug Power will continue to dilute shareholders and burn cash as it attempts a turnaround.
While there are some bright spots, such as improved margins on hydrogen fuel and electrolyzer sales, the company still has a long way to go, so I would stay away from the stock for now.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Plug Power’s Troubles Continue: Should Investors Throw in the Towel on the Stock? was originally published by The Motley Fool
