Plug Power's 43% Plunge May Just Be the Beginning

By Scott Levine Markets Fool.com

Although Plug Power (NASDAQ: PLUG) reported some successes in bringing fuel-cell solutions to customers in 2016, the company's stock certainly didn't reflect it -- ending the year down more than 40%. Remaining ever-optimistic, though, management is far from short on expectations for the coming year. But whether Wall Street appreciates the successes and sends the stock back north is a different story.

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Image source: Getty Images.

Looking back

Although Plug Power won't release full-year 2016 earnings until March, it recently provided investors with a glimpse into what they will hear: the company reported the deployment of 4,010 of its GenDrive fuel cell units for the year. According to management, the company exceeded its guidance of 3,800 to 4,000 units -- setting a company record -- thanks to customers such as Wal-Mart, BMW, and Home Depot.

Another of Plug Power's success in 2016 was found during its Q3 earnings report. For the first time in the company's history, it reported a positive gross margin in its service business. Whereas the company reported a negative-55% gross margin in Q3 2015, Plug Power reported a service business gross margin of 5.9% in the recently completed third quarter. This achievement is only one small step toward management's long-term goal: a service business gross margin of 30%.

Working to expand the diversity of its offerings, Plug Power announced a partnership with two Chinese companies to "develop new fuel cell applications and fueling solutions to be utilized in the large and expanding industrial electric vehicle market in China," according to the company's press release. Should the partnership between the companies prove to be successful, Plug Power will have 13,500 vehicles and a fueling station network deployed by 2020.

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Looking forward

There don't seem to be any singular growth catalysts on the horizon for Plug Power in 2017, but that doesn't mean there aren't things to keep an eye on. For example, it will be interesting to see how the company fares in light of the expired investment tax credit (ITC). Meant to help the fuel-cell industry gain traction in the marketplace, the ITC failed to receive renewal from legislators in what was deemed by some as an "oversight." On the company's Q3 conference call, Andy Marsh, Plug Power's CEO, asserted his confidence that the company wouldachieve its target of $275 million in bookings for fiscal 2016 regardless of whether the ITC was extended.

Image source: Plug Power.

Whether the company, in fact, achieved this goal remains to be seen; however, the question still remains as to whether the company can survive in an ITC-free environment in the years to come.

One concrete thing to look for is whether Plug Power and its partners can succeed in delivering the plannedtwo industrial delivery truck prototypes -- featuring Plug Power's ProGen fuel-cell engines -- by March. If successful, the company will proceed to realize its "short term projection for more than 500 vehicles and a fueling station network to be deployed in the Shanxi province over the following year," according to the company.

Looking at shares

Considering where the company has recently come from and where it's headed, we can now turn to the stock. At this point, valuation metrics are inconsequential. According to Morningstar, the stock is trading at 2.2 times trailing sales while the five-year average is 5.2 times sales. But that's certainly not a reason, in and of itself, to pick up shares.

For long-term investors, the pivotal question is: Can this company find a path to sustainable growth -- one which reflects profitability? And as it stands now, the answer seems to be no. Only when the company consistently demonstrates the ability to control expenses and report a profit would the stock seem worthy of consideration.

The takeaway

It may seem like Plug Power is starting the new year on the right foot, announcing a company record of GenDrive deployments in 2016. But before the celebration begins, let's look below the surface. Last year, also in late January, Plug Power released a business update on its fiscal 2015 performance. In the announcement, the company reported several highlights: a 50% increase in revenue from fiscal 2014, a record year in contract bookings, GenDrive gross margins above 25%, and the achievement of its goal of acquiring six new customers.

What did we get in this press release? Only a record number of GenDrive deployments. Were there no other highlights? This should give investors pause. Perhaps it's much ado about nothing, but I get the sense that when the company has good news to report, it's eager to do so.

The dismal performance of Plug Power's stock should come as no surprise, and short of a significant improvement in 2017, investors can expect -- if not the same decline in the stock -- lack of any significant improvement.

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Scott Levine has no position in any stocks mentioned. The Motley Fool recommends BMW and Home Depot. The Motley Fool has a disclosure policy.