Is it about to turn the corner from the outlet?

While electrification gets a lot of headlines, energy investors shouldn’t overlook hydrogen as a potential growth area in the decarbonization economy. It is easy to store and transport and is combustible. This offers many advantages over solar and wind energy, which are only present intermittently and subject to expensive battery storage.

Power outlet (PLUG -3.09%) has invested aggressively to become a leader in the burgeoning hydrogen economy. However, the company has outgrown its skis, taking massive losses as it builds its infrastructure while diluting shareholders to raise cash for the effort.

But with its stock down more than 99% from all-time highs and now only trading around just 60% of book value, is the stock worth dumping? After all, there were some improvements in his last quarter that shouldn’t be overlooked.

Plug’s recent results look extremely ugly

Plug has a somewhat complicated business, but it boils down to producing hydrogen, delivering hydrogen to business customers, and selling hydrogen equipment, either for stationary power or hydrogen fuel cell forklifts. The company has also built its own hydrogen production facilities in Tennessee and Georgia, with another plant built in a joint venture in Louisiana.

Building all these manufacturing businesses takes a lot of time and money, and Plug is still making big losses. Management had until now expected greater adoption of hydrogen. But high interest rates and delays in government incentives have slowed things down for Plug customers.

As a result, Plug’s revenue fell 45% last quarter, while the company’s operating losses widened from ($233.8 million) to ($244.7 million).

But gross margins are improving under the hood

However, there were actually some positives for the Plug when looking under the hood. Practically all of the decline in the last quarter was due to lower sales of equipment to external customers. But management also noted on the conference call with analysts that a $70 million order could not be recognized in the quarter, even though Plug had already received the cash.

This has caused revenue from equipment sales, which account for over half of revenue, to drop and look pretty ugly, falling along with overall results.

However, Plug’s other segments, including the services Plug performs on fuel cell vehicles and electric equipment, power purchase contracts for turnkey services and hydrogen fuel delivery, all gradually improved margins. This came from increasing prices for customers and delivering more volume through fixed infrastructure.

Data source: Plug Power quarterly report.

Make no mistake, these are not good numbers taken in isolation. But looking beyond the loss of equipment sales, which could be somewhat attributed to revenue recognition, gross margins improved in all of Plug’s other segments as those segments’ revenues grew.

And there could be more cost cuts down the line. Plug announced the hiring of Dean Fullerton as its new COO in late July. Fullerton comes from Amazonwhere he was vice president of Global Engineering and Security Services. Of note, Amazon is a big Plug customer.

Fullerton joined management on the recent conference call, citing several areas where he believes he can cut costs from the business. As we all know, Amazon is a master at cutting costs to serve customers, so there could be even more savings in the future as Plug grows revenue in the future.

Image source: Getty Images.

But Plug is too risky to invest in right now

It should be noted that even with these improvements, Plug still consumed about $616 million in the first half of 2024 alone. While the company also has nearly $1 billion on its balance sheet, much of that is restricted, so there are limits to how much it can use and for what purpose.

Therefore, Plug has enough cash on hand for another year even as the company continues to improve margins and has access to all the cash. Furthermore, this improvement depends on the continued adoption of hydrogen as a new energy source. While this should happens over time, it is highly uncertain that hydrogen adoption will continue on Plug’s projected timeline.

So the stock is almost uninvestable right now. But uninvestable doesn’t mean Plug can’t be on your watch list.

If the company’s improvements continue and if hydrogen adoption accelerates in the near term, perhaps with interest rates falling, Plug could make for an interesting turnaround story. Still, it’s best for investors to wait for evidence that the company is reaching true bottom-line profitability before stepping in.