Below is the latest from Kerrisdale Capital, which has disclosed a short in Plug Power Inc (NASDAQ:PLUG)

We are short shares of PLUG. Please click here to read full disclosures. – See more at: http://kerrisdalecap.com/commentary/#sthash.sInRGdUB.dpuf

Introduction

It’s been a sensational year for investors in Plug Power (PLUG), with shares rising from pennies to more than $10. But now, it appears the party has ended, as investors are starting to cut through the promotional hype that has enveloped the company to rediscover the business’s less than promising fundamental outlook. We expect shares to continue declining sharply in coming weeks. In particular, it’s hard to imagine a company that no one wanted to buy at 15 cents a share last year is now worth $7.50. Plug Power, contrary to the bullish hype, faces severe competition, has a weak and unproven business model, and likely lacks in the research capability to innovate its way out of its current precarious financial situation.

At $7.54/share, 17.7x 2014 revenue, and a market capitalization of $1.2 billion, we believe Plug Power is flagrantly overvalued. PLUG’s dramatic share price surge has fueled speculation from investors who seem to know little about Plug Power’s history and operating background.

We explored what a best-case scenario would yield for equity investors. Using a 10-year DCF, we believe that PLUG is worth less than $2.50/share, well below the current price of $7.54. Even under the highly optimistic assumption that PLUG achieves its $70m revenue target in 2014, quadruples its sales over an eight-year period, and achieves a long-term gross profit target of 32%, shares would be 68% overvalued. Even worse, in the much more likely scenario that PLUG disappoints investors and misses its long-term guidance targets, PLUG shares are worth a fraction of that target.

After the February announcement of its 1,738 unit Walmart deal, PLUG’s shares nearly doubled on investors becoming entranced with a growth story. However, a single order is not an indication of sustained growth, especially in the context of PLUG’s existing customer list. And even though most of these customers have been with the company since 2008-2010, none have adopted PLUG’s solution on a substantial scale. For example, the Walmart order represents just 5% of its entire fleet. Third-party research further suggests that PLUG’s lack of customer penetration is due to the expense of fuel cells relative to battery – fuel cells are only economically viable for a small subset of distribution centers: those with space constraints, round-the-clock shifts, and expensive workforces. Facilities that lack these difficulties will continue to prefer lower-cost options.

Evidence strongly suggests that fuel cells will remain a niche solution in the warehouse. According to General Electric‘s chief engineering officer of GE’s Power Conversion division, fuel cell technology is too dependent on platinum to be more than a niche product. But should fuel cell technology ever reach cost parity with batteries, the economic benefits will largely accrue to Ballard Power (BLDP) and other owners of the underlying fuel cell technology. After all, Plug Power is merely a value-added integrator of Ballard’s fuel cells, and no more. If Honda or Toyota decided to produce fuel cell powered forklifts tomorrow, these better capitalized competitors could probably produce a more sophisticated fuel stack, undercut PLUG on price, and aggressively take market share. In fact, Toyota has already developed a prototype for its line of fuel cell forklifts with plans to produce a commercial line “in the near future”. With a threat as imposing as Toyota looming, investors should be skeptical of PLUG’s long-term growth projections.

The recent surge in the stock price has been driven by speculative investors hoping to make a quick profit, as indicated by the past 1-month average daily trading volume of 89.5 million (CapitalIQ), representing 62% of PLUG’s 144 million basic shares outstanding (latest 10-K10-Q). On March 7th, 2014 CEO Andrew Marsh appeared on CNBC and presented no new information, yet the stock closed 30% higher. Three days later, the stock surged another 25% despite the absence of new updates. We believe that as this speculative momentum ends, investors will look to lock in short-term gains and move on, making PLUG an extremely compelling short opportunity at its current price of 18x 2014E revenue.

 

Stark Overvaluation Relative to Peers and Other Speculative Stocks

PLUG’s stock price has multiplied by 44x in the past year based on statements made by CEO Andy Marsh. At its current valuation of $7.54 per share, investors are no longer adequately compensated for bearing PLUG’s many execution risks. Shareholders have ignored downside risk on the notion that the company has already transformed its industry, but PLUG has yet to deliver on any of its promises.

Capitalization and multiples PLUG

PLUG’s current share price of $7.54 implies LTM and 2014E revenue multiples of 43x and 18x, respectively. To put this into perspective, PLUG’s current market capitalization is higher than the sum of the market capitalizations of Ballard Power (PLUG’s critical supplier of fuel cell stacks) and Hydrogenics Corporation (competing manufacturer of hydrogen equipment and fuel cell-based backup power systems), despite expecting to generate less than half of their combined revenues. Even more astounding, PLUG’s forward sales multiple of 18x exceeds that of even Tesla and Facebook, more innovative companies that have already demonstrated above-market growth. Elon Musk himself had a colorful opinion of the technology: “Fuel cells are so bullshit.”

Fuel cell companies

 

PLUG is no Innovator — It’s Merely an Integrator of Third-Party Technology

Despite PLUG’s claims to be an innovative manufacturer, our research suggests that PLUG is actually a value-added integrator. Crucially, PLUG does not manufacture critical components of the GenDrive system. This includes the all-important fuel cell stacks that PLUG sources exclusively from Ballard Power Systems. From PLUG’s 2012 10-K:

“Although most components essential to our business are generally available from multiple sources, we currently obtain certain key components including, but not limited to, fuel cell stack materials, energy storage devices, and other major components from single or limited sources. In 2010, we signed a supply agreement with Ballard Power Systems, or Ballard, which continues through December 31, 2014.  Under this agreement, Ballard serves as the exclusive supplier of fuel cell stacks for Plug Power’s GenDrive product line for North America and select European countries.”

While investors expect PLUG to eventually achieve significant revenue growth via mass customer adoption, we’d argue that PLUG’s economics will largely pass to Ballard Power. After all, an integrator of parts is far more commoditized, and far more expendable, than a technology innovator.

If PLUG were truly a pioneer in the fuel cell industry, we would expect it to expend significant resources on research & development. Comparatively, fuel cell companies like Ballard, which focus on developing fuel cell stacks and systems for automobile OEMs and system integrators, spend significantly more on R&D. Since 2009, Ballard has spent more than 2.6x on R&D than PLUG, which makes sense given PLUG’s inferior placement in the value chain.

Cumulative R&D Spend PLUG

Given PLUG’s dependence on Ballard as its sole supplier of fuel cell stacks, shareholders should be aware that Ballard, like PLUG, has never been profitable. In the event that Ballard faces a liquidity crisis or is

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