Continuously inking agreements with new customers and receiving validation of its solutions from old customers, Plug Power (NASDAQ: PLUG) has proven that hydrogen fuel-cell solutions represent a viable option for many businesses that rely on warehouses. And material handling equipment isn't the only market where it's making inroads. In May, for example, Plug Power delivered its first fuel-cell electric vehicle delivery van for on-road use in North America to FedEx.
Much to the chagrin of investors, however, the company has consistently failed to demonstrate that supplying its fuel-solutions can be a profitable endeavor. Although it's highly unlikely that 2018 will be the first year that the company will report a profit, there are other ways in which investors can deem this year the most successful one in the company's existence.
Charged up about hydrogen
Plug Power has demonstrated the value of its fuel-cell solutions for material handling equipment by making two deals in France, new agreements with Walmart, and a blockbuster collaboration with Amazon.com. In addition to making for attention-grabbing headlines, the deals have had a powerful impact on the company's financial statements -- so powerful in fact that 2018 will most likely be a record year for the company in terms of revenue.
On a trailing-12-months basis, Plug Power has reported sales of $115 million according to Morningstar. At the end of Q1 2017, meanwhile, Plug Power had reported revenue of $86 million. The company's superior performance this year stems largely from the deal with Amazon, which was estimated to contribute about $70 million to Plug Power's top line in fiscal year 2017 and $600 million overall.
Management, in fact, is so optimistic about this year's performance that in February it had forecast 2018 revenue of $155 million to $180 million. Skeptics might argue that management is being too optimistic about this guidance, and perhaps it is. But as long as the company generates sales above $103 million for 2018, it will set a company record. In other words, Plug Power can miss the lower end of its guidance by 34% and still have its best year in terms of sales.
Turning a corner
While Plug Power has succeeded in gaining favorability among various businesses, it has failed to recognize growth on its bottom line. In fact, the company, unlike its leading fuel-cell competitor, Ballard Power Systems (NASDAQ: BLDP), has failed to consistently generate a gross profit. Over the past 10 years, Ballard has averaged an annual gross margin of 20.1% according to Morningstar, while Plug Power has generated a gross profit in only one of the past 10 years -- a period in which it has averaged an annual negative gross margin of 36.6%.
But this could very well be the year in which the company swings toward greater profitability. In the first quarter, for example, the company reported a gross margin of negative 14.6%. Although it still indicates a gross loss, it is markedly better than the negative 29.4% gross margin it reported in Q1 2017. Management largely attributes the improvement to higher volumes, suggesting that the gross margin may improve throughout the year with respect to the scope of the deal with Amazon.
Pumping the brakes
Surely, this year could reign supreme in Plug Power's history, but investors would be well-suited to sprinkle management's auspicious outlook with a few grains of salt. For one, it's always a prudent strategy, regardless of the company, to refrain from taking a company's forecast at face value, and instead opting to dig deeper. In Plug Power's case, though, it's an even more pressing need considering the company has repeatedly stoked investors' optimism with its guidance while leaving shareholders discouraged when earnings reports are actually released.
Looking back at 2017, we find two glaring examples of management's miscalculations: In Q1 2017, the company guided for an annual gross margin of 8% to 12% and cash from operating and investing activities of negative $25 million to negative $35 million. How did the company fare? It reported an annual GAAP gross margin of negative 27% and cash from operating and investing activities of negative $104 million. Arguably, though, the most egregious example of Plug missing estimates stretches back to 2013 when management estimated the company would reach breakeven on an EBITDA basis by Q2 or Q3 of 2014. The company, however, reported an EBITDA loss of $84 million.
What I believe
In respect to revenue, it's reasonable to believe that the deals with Amazon and Walmart will help Plug Power to achieve record revenue. And if the top line is the only criterion upon which we judge the success of the company, 2018 will most likely be its best year yet. By other metrics (and in consideration of management's guidance), however, there's cause for concern, suggesting that this year may not actually be the one that glimmers brightest for shareholders. Taking the good, the bad, and the ugly with Plug Power, I'll be watching this story play out from the sidelines, and I think that only the most risk-tolerant investors should assume the same approach.
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