Shares of Plug-in power supply (NASDAQ: PLUG) rose in May after the company announced it had received a conditional commitment for a $1.66 billion loan from the U.S. Department of Energy (DOE). However, the stock price is now well below pre-announcement levels and a US senator has questioned the loan.
The stock has now fallen by more than 70% over the past year.
Let’s take a look at the proposed DOE loan, why it’s being questioned, why it’s so important to Plug Power, and whether the stock price drop is a buying opportunity.
Fixing a Flawed Business Model
Plug Power has long struggled with a flawed business model that it is now looking to fix. The company initially found a niche by selling fuel cells used in forklifts and other material handling equipment to companies with high-volume, three-shift warehouses, such as Amazon And Walmart.
But the flaw in the business model was that it would sell the hydrogen fuel needed to run the fuel cells at a loss. This was seen in the company’s most recent results, where a negative gross margin led to a gross loss of $159 million.
To underscore how bad this is, the loss was measured before operating expenses. The company is losing a lot of money on the hydrogen fuel it sells, though it also lost money on the equipment it sold in the first quarter.
Obviously, sourcing or making something for $3 and then selling it for $1 isn’t a sustainable business model, but that’s pretty close to what Plug Power did with hydrogen fuel last quarter. Over the years, the company has sourced hydrogen primarily from third parties and sold it to customers at a big loss.
So it has started building a network of its own hydrogen plants that can produce fuel that it can sell to its customers at a profit.
This is where the DOE loan comes into the picture. In May, the company was given the opportunity to secure the loan – if certain conditions to be negotiated between the company and the government were met – to help it build out its network of hydrogen plants. If approved, the loan would help finance up to six green hydrogen production facilities.
Plug Power already has two plants operational and expects another one to be ready by the end of this year. This will cover approximately 65% of the expected demand.
The loan would allow for the construction of a large manufacturing facility in Texas next year that would meet customer needs and allow the company to expand further.
However, in June, Senator John Barrasso, a Republican from Wyoming and ranking member of the Senate Energy and Natural Resources Committee, asked the DOE inspector general to investigate “any possible impropriety” of the DOE’s Loan Programs Office and the director of the loan program, Jigar Shah, due to possible conflicts of interest. The senator also questioned Plug Power’s viability given its $1.4 billion in losses last year.
While Plug Power could seek financing elsewhere if the loan is ultimately not approved, the terms and interest rates would undoubtedly be much less favorable. And given the company’s financial position and negative operating cash flow, there’s no guarantee it could find an institution willing to lend the money.
Is the sale a buying opportunity?
Plug Power shares soared as much as 70%, to $4.90, the day after the DOE loan offering was announced. Today, it trades more than 15% below its pre-announcement price.
If the loan is approved, there should be immediate upside potential given the past reaction and where the stock is now trading. However, that may be short-lived.
Plug Power, meanwhile, has said it wants to reach gross margin breakeven in its fuel business in the fourth quarter, which would not be dependent on the loan. That’s a potential catalyst, but a gross margin breakeven is still not a complete solution because it won’t make the company profitable or generate cash.
At this point, I would consider Plug Power more of a lottery ticket. If it gets the loan, builds out its factories and becomes positive in terms of gross margin and free cash flow, there could be a huge upside in the stock. But like most lottery tickets, there is also a chance that it will become worthless.
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With a Senator Questioning Plug Power’s Government Loan, Is This an Opportunity to Buy the Stock? was originally published by The Motley Fool
