Plug problems persist. Should investors throw in the towel on stocks?

The problems that affected Power socket (NASDAQ: PLUG) persisted in the second quarter as the company posted weak results again. The stock has lost about 80% of its value over the past year.

Let’s take a closer look at the problems facing the company and whether it has an opportunity to make a change.

Problems with Plug Power

The biggest problems facing Plug Power are negative gross margins and cash outflows. The company found a niche selling fuel cells used in forklifts and other material handling equipment to high-volume warehouses. However, along with these offerings, it has long sold the hydrogen fuel needed to power these devices at a loss.

That trend continued in its most recent quarter, with the company reporting a gross loss of $131.3 million. That was worse than the $78.1 million gross loss it posted a year ago, but an improvement from the $159.1 million gross loss it posted in the first quarter.

For the second time this year, in addition to negative gross margins for fuel, it also had negative gross margins for equipment. On the bright side, its negative fuel gross margins have seen some improvement stemming from the green hydrogen production facilities the company has built.

Building hydrogen product plants to supply hydrogen fuel to its customers is a big part of its plan to try to reach positive fuel gross margins. Increased production at its Georgia facility, along with some price increases, helped fuel the improvement. Meanwhile, a new hydrogen plant it will build in Louisiana in a joint venture with Olin will start producing hydrogen in the fourth quarter.

With the company selling both its equipment and fuel for less than it cost to produce, Plug Power continued to rack up losses and burn money. In the quarter, the company posted a loss of $262.3 million, or $0.36 per share. Meanwhile, it had operating cash outflows of $254.7 million, while its free cash flow was negative at $350 million.

Looking at Plug Power’s balance sheet, the company has $214 million in debt versus $62.4 million in cash. It also has $956.6 million in restricted cash. Restricted cash is largely from prior sale/leasebacks that will be released over the lease term and to a lesser extent from letters of credit secured by security deposits.

Given the lack of available cash on its balance sheet, the company has been aggressively selling shares to help finance its operations and continue to build out its hydrogen plants. It received $266.8 million in net proceeds from stock sales this quarter and $572.1 million in the first half of the year.

The story continues

To put Plug Power’s cash burn and equity raises into perspective, the company only has a market cap of about $1.8 billion based on its most recent share count.

Can Plug Power problems be solved?

It’s possible that the company will fix its problems, but it’s increasingly unlikely to happen. First, its core fuel cell business has underperformed. With all of Plug Power’s problems, it’s almost easy to miss that its equipment sales fell nearly 65% ​​year-over-year in Q2, all while selling at a loss. But even when it sold more equipment last year, its gross equipment margins were still just over 13 percent.

The company is awaiting a potential $1.66 billion low-interest loan from the Department of Energy to help finance the rest of its hydrogen plant construction, although the loan has been contested by U.S. Sen. John Barrasso (R-Wyo.), a ranking . member of the Senate Committee on Energy and Natural Resources. Without the loan, the company may struggle to find additional financing given the current state of its business.

Meanwhile, while gross margins for hydrogen fuel have improved, the likelihood of fuel sales being a strong profit driver seems unlikely. Breaking even on fuel margins would be an achievement, but that alone does not solve the company’s problems.

It’s worth noting that if Plug Power grew its business to $1.5 billion a year in revenue with 25% total gross margins, the $375 million in gross profit still wouldn’t cover corporate costs of about 400 million dollars with which it is in pace for this. year. The company expects revenue between $825 million and $925 million this year. This just goes to show how far from profitability it is. In the meantime, Plug Power will continue to dilute shareholders and eat up cash as it tries to implement a turnaround.

While there are some bright spots, such as improved margins on hydrogen fuel and electrolyser sales, the company still has a long way to go. As such, I would stay away from the stock right now.

Should you invest $1,000 in Plug Power right now?

Before buying stock in Plug Power, consider the following:

The Motley Fool Stock Advisor the analyst team has just identified what they think they are 10 best stocks for investors to buy now…and Plug Power was not one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you would have $641,864!*

Stock advisor provides investors with an easy-to-follow blueprint for success, including portfolio construction guidance, regular updates from analysts, and two new stock picks every month. The Stock advisor the service has more than four times return of the S&P 500 since 2002*.

See the 10 stocks »

*The stock advisor returns as of August 12, 2024

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Plug problems persist. Should investors throw in the towel on stocks? was originally published by The Motley Fool