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On January the 23rd, Plug Power (NASDAQ:PLUG) will provide its annual business update during a conference call with CEO Andy Marsh and CFO Paul Middleton. Plug Power’s stock has been in very turbulent waters recently. The stock lost almost half of its value during the first weeks of 2024. In this article, I will analyze what to pay attention to during this business update. I believe that anything related to possible margin improvements or the possible DOE loan which Plug is pursuing has the possibility to set the markets in motion.
Introduction
Recently, Plug announced a $1B capital raise using an at-the-market (ATM) facility. As fellow Seeking Alpha contributor Henrik Alex recently wrote, this capital raise will likely result in major dilution for Plug shareholders.
I wrote about Plug Power previously, sounding the alarm about the company’s deteriorating margins in this article of September 2023, and also about the urgency to raise new cash and possible dilution for shareholders last December here. As I wrote in this article: “Issuing additional equity is likely the most realistic option for Plug at this stage, but it won’t solve the underlying problems the company faces, and only buys it more time.”
Issuing additional equity is exactly what Plug did, the details of which you can find here. With this additional cash, the company threw itself a lifeline that it can use to finance its operations for a couple of quarters longer. This came at the expense of existing shareholders that will likely face heavy dilution as a result.
If Plug Power continues its current cash burn, this capital raise will be far from enough. As I also wrote in my previous article, a loan from the DOE, tax credits or the MOA with Fortescue (OTCQX:FSUMF) might be able to ease Plug’s financial distress temporarily, but without improving its bottom line, this is a dead-end street. In this article, I will focus on exactly this: what can we expect of Plug’s upcoming annual business update and the company’s expectations for the next year? Can we realistically see a margin improvement happening? Let us take a look!
Cash needs
As I already mentioned, the $1B share issuance alone is unlikely to alleviate all of Plug’s current financial woes. The company needs more, and even with margin improvements it is almost certain that the company will continue to burn cash at an alarmingly quick rate.
It is likely that corporate debt solutions are – at least for now – off the table, since Plug chose to issue additional equity using the ATM facility. The last thing we heard about a possible loan of Plug from the Department of Energy was that Plug is “working towards a conditional commitment from the DOE Loan Program Office”, and that the negotiations are reaching the final stages. Achieving this loan would be very good news, since this loan could be used to cover the costs of plant investments. But this loan, no matter how large it is, will likely not fix most of Plug’s cash problems, since it does not stop the cash burn.
During the first three quarters of 2023, Plug recorded an operating loss of more than $717M. This is different from the company’s liquidity, which also includes capital investments and all other costs and benefits. As Henrik Alex rightfully stated, Plug’s liquidity is currently deteriorating at a rate of about $500M per quarter, and the new ATM facility only provides for “two additional quarters at the current rate of cash usage”.
So Plug will have $1B available from its ATM facility, and possibly up to $1.5B from a DOE loan. This amounts to $2.5B, which mathematically would cover liquidity for Plug for about five quarters (with a lot of ‘ifs’ and ‘buts’ because the DOE loan will be coupled with some conditions). That is, if liquidity continues to deteriorate at the same rate for Plug. Of course, the best case scenario is that margins spectacularly improve and operating losses are reduced. Let us now look at the numbers to see to what extent this could be realistic for 2024:
Revenues, expenses, margins and expectations for 2024
First (and this might be a bit controversial) I believe that one particular metric will not be very interesting during the upcoming annual business update: Plug’s revenue growth. Yes, I know that this is about the only metric that was positive during the last year. But to be honest, a company in a financial position such as Plug Power’s should focus on stopping the cash burn, regardless of revenue. Of course, revenue growth is likely to be beneficial for margin improvements, although this has not been the case for Plug during the past quarters. Still, I am not very interested in Plug’s revenue numbers. In the table below you can find Plug Power’s latest financial statement of Q3 2023. Let us discuss which metrics I believe are interesting ones.
Plug Power Q3 report
Plug Power Q3 2023 statement of operations (Source: Plug Power Q3 report)
As we can see in this statement, the category ‘sales of equipment, related infrastructure and other’ is profitable for Plug. The company is losing money on service, and additional losses are included in the provisions for loss contracts related to service. But the main items where Plug is losing tons of money are power purchase agreements and fuel. The company is simply selling fuel and power way below its cost. This is a main area where Plug needs to see some major improvements in order to reduce its losses.
In its Q3 report, Plug mentioned “we have achieved 21% sequential gross margin improvement in 3Q 2023 compared to 2Q 2023 in our fuel business”. I consider this to be a step in the good direction, and I expect that on the operational level, emphasis on these margins will be increased.
Subsidies for hydrogen produced using electrolyzers could be an important way for Plug to reduce its losses on fuel and power, but these have been coupled with strict environmental guidelines, reducing the scope for Plug to make use of these subsidies. As CEO Andy Marsh mentioned:
The draft rules “will fall woefully short in achieving the Administration’s decarbonization objectives” and “are counter Congress’ intent,” said Andy Marsh, chief executive officer of hydrogen company Plug Power.
I will not go into detail about the hydrogen subsidies here, but as the draft of the legislation stands, it is likely that Plug will not be able to benefit as much as it would have wanted from these subsidies. This means that the company has to focus on achieving margin improvements on its own, without major help from subsidies.
The expectation is that, once Plug finishes construction of new green hydrogen production facilities, the average costs of its hydrogen production can be brought down, which will have a positive impact on the margins of Plug. But Plug’s green hydrogen plant in Georgia is about a year behind schedule, although it is supposed to have reached full production at the end of 2023, so we might receive positive news about this plant during the conference call. Plug also has some other plants in construction in Louisiana (expected in 2024), Texas and New York (both expected in 2025). Power outages at Plug’s Tennessee production facility forced the plant to go offline for a couple of weeks.
Since I believe improving margins is the key towards an eventual viable hydrogen business for Plug, I will paste the same table here as I used in my previous article:
| Quarter | Revenue | Cost of revenue | Gross margin |
| Q4/2022 | $221M | $301M | -36% |
|
Q1/2023 |
$210M | $280M | -33% |
| Q2/2023 | $260M | $338M | -30% |
| Q3/2023 | $199M | $337M | -69% |
Margins of Plug Power over the last 4 quarters (Source: Plug Power quarterly reports)
It seems unlikely that margins of these levels can be turned around by business as usual and incremental improvements. I believe it is long overdue, but a major reorganization might be the only way to pave the way for real margin improvements in the future.
During the conference call, I am most interested in clues about possible margin improvements of Plug, such as the following:
- Mentioning of cost reductions in hydrogen production
- Positive (or negative) news about construction and coming online of Plug’s hydrogen plants
- Will there be new provisions for loss contracts related to service necessary?
- Any news about Plug’s PPAs (power purchase agreements)
- News about to which extent Plug is likely able to make use of the green hydrogen production subsidies
- Major reorganizations at Plug such as dramatic cost-cutting, renegotiation of existing contracts or sales of some assets
What to pay attention to during Plug Power’s annual business update
Likely the number 1 question on most people’s mind is: how close is Plug to the DOE loan and under which conditions? In case Plug would mention during the upcoming conference call that agreement was reached about the loan, this could lead to a recovery for the shares. Of course, it would be in the interest of Plug to aggressively use its ATM facility in case of a rally, so I believe that such a recovery would be short-lived.
I think other news that influences the bottom line of Plug is also likely to be impactful for investors. Margin improvements and decreasing the velocity of the cash burn is very important, and any positive news related to this is likely to be welcomed by investors.
I think that at the moment, the scope for deterioration of Plug’s financial situation is relatively limited. As such, I do not expect that the stock will respond as strongly to negative news as it will to positive statements during the upcoming conference call. On the other hand, Plug has a history of overpromising and underdelivering, which is illustrated by the company’s streak of earnings misses. This might make investors more skeptical of positive news.
My own opinion
People who have read my previous articles about Plug know that I am quite critical of the company’s management and the way in which the company is dealing with its financial situation. At the moment, Plug is in survival mode, and the company likely had no other choice but to create the ATM facility to obtain enough cash just to get through the coming quarters. If the company can stay afloat, there might be a possibility for eventual profitability on the horizon.
But I think that anything other than a major reorganization, combined with sales of some assets, renegotiation of existing contracts and dramatic cost reduction will not be enough. I believe that Plug is a dead-end street for investors. Even if the company – against all odds – will survive financially and become profitable with its hydrogen business, current investors will end up diluted by the ATM facility. Plug is likely to use this facility extensively just to stay in business. A possible DOE loan could provide for some relief, so if Plug would announce positive news this could provide a catalyst for a relief rally. But I expect such a rally to be short-lived because of the ongoing share issuance. I consider Plug Power to be a very speculative and dangerous investment for anyone other than short-term traders.
