Why Did Wall Street Beat Up Shares of Plug Power in August?

By Markets Fool.com

Bears waved goodbye to their shares in a big way this summer. Image source: Getty Images.

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Driving the stock down more than 14%, Wall Street punished Plug Power (NASDAQ: PLUG) in August.It's difficult to pin the stock's drop on one event -- the company didn't make any major announcements -- so let's look at several factors that may have led to the stock's downward movement.

The unusual suspects

Although August ended on a bitter note, there were some highlights from earlier in the summer. The company released positive news in July, when itrevealed that it would be expanding its footprint in Europe. But the excitement -- shares rose 10% following the second announcement -- was short-lived. Shares have fallen 14% since the initial positive movement stemming from news of the twodeals in France.

Another possible factor is an announcement General Motors (NYSE: GM)made on Aug. 30. The day also marked the stock's worst single-day performance for the month, as shares dropped nearly 10%. On that day, GM announced that along with the U.S. Army, which will explore the military applications of the technology, itwill reveal a Chevrolet Colorado-based fuel-cell electric vehicle in October.

The vehicle is the product of an agreement made between GM and the Army in 2015. Image source: General Motors corporate website.

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Plug Power investors may have been scared off by the announcement and comments from Charlie Freese, executive director of GM's Global Fuel Cell Activities:"This project is another example of how fuel-cell propulsion can play a role in non-traditional applications."

It may seem unlikely that Plug Power's investors would react so negatively to an announcement of this sort, since the company deals in the material handling equipment market, not the automotive. But there is a connection. Investors may have been recalling comments from Andy Marsh, Plug Power's CEO, on the Q1 earnings conference call. Marsh reported that the company had "kicked off expansion on our high-power platform based on plug stack and system designs to grow our markets in the vehicles that are larger than forklift trucks." Specifically, Marsh was referring to the collaboration with FedEx on a range extender program. According to Marsh, FedEx wants to "deploy hybrid hydrogen battery-powered delivery trucks to expand the useful range of these vehicles from 60 to 160 miles." It may seem irrational to conclude that investors interpreted GM's announcement as a threat, but no one ever said investors were always rational.

Stating the obvious

Then again, the sell-off may simply be the result of investors who processed the company's Q2 earnings report from earlier in the month. Besides posting a $0.07 loss per share, the company reported $15.8 million in negative operating cash flow for the first six months of 2016. Though reporting negative operating cash flow is par for the course, the company reaffirmed its guidance of using less than $20 million in operating cash flow for fiscal 2016. Likely to miss its target, the company will probably report more than $5 million in negative operating cash flow in the next two quarters.

But it's not just missing the target that could be troubling to investors. The sell-off could also reflect investors' already low and waning trust in management. It's hard to forget Marsh's comments from a conference call in2013, when he suggested that the company would achieve breakeven on an EBITDA basis in 2014. In fact, the company grossly missed the mark and reported an EBITDA loss of $84 million.

Another source of concern from the Q2 earnings report is the balance sheet, since the company incurred $24 million in long-term debt during the quarter. Financing its operations through debt is not the norm for the company. It has mostly relied on raising equity to keep the lights on; the company had 76 million shares outstanding at the end of 2013 and 176 million shares outstanding at the end of 2015. Now, instead of only being concerned with dilution -- likely to reoccur in 2017 -- shareholders find themselves concerned with a debt-laden balance sheet.

The takeaway

Although Plug Power, since 2013,has demonstrated the ability to impressively grow its top line, it has equally failed in demonstrating the ability to convert the revenue to profits. And even though management continually suggests that achieving breakeven on an EBITDA basis is just around the corner, it continually circles the wrong block and never reaches the right corner.

Plug Power's steep sell-off in August should not come as a surprise. Sporting a beta of 1.83, the stock is nearly twice as volatile as the market. To what does Plug Power's stock owe the pleasure of such volatility? It may simply result from investors, initially attracted to the Siren song of a hydrogen-powered future, who soon realize that the future Plug Power promises may not be profit-filled.

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Scott Levine has no position in any stocks mentioned. The Motley Fool owns shares of and recommends FedEx. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.