Plug Power Inc Needs To Come Out Of ‘Chicken And Egg Problem’

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Plug Power Inc (NASDAQ:PLUG) shares have rallied 13-fold on the news that the company has received new orders from Wal-Mart for 1,700 fork lift-fuel-cells and six -year service contracts. FBR analyst Aditya Satchare assigned it a price target of $8 based on the projected 10% fork- lift market share and $200 million in annual revenue by 2017. Adam Gales at Motley Fool, however, believes that Power Plug do not justify such level.

Plug Power Inc’s strategy not permanent solution

Satchare projection represents 700% sales increase in just four years. Going by Satchare’s growth projections, Plug Power is 41.5% undervalued.

Gales argument is based on three reasons namely accelerating dilution, accelerating costs, and a small potential market.

First reason cited by Gales is that even though Plug Power is gaining more orders, the company has followed the trend of diluting the shareholders faster, when sales grow. For instance, from 2009 through 2011, the company surged its sales 133% from $12 million to $28 million. The number of shares surged 46% over this time. Since 2011, the number of units has surged 1050% while sales for this year are estimated to increase 164% since that time.

Plug Power would need substantial amount of cash to grow at the anticipated rates. The company acquired ReliOn for cutting down its dependence on the Ballard system, but paid just $4 million, which implies that ReliOn is a small scale producer of fuel-cells, believe Gales. If Plug Power is looking for removing Ballard Power Systems from its fuel-cell supplier list permanently, it needs a lot of cash to make ReliOn bigger. More use of cash to take business higher will bring down the margin of the company.

Wait until some clarifications

Another argument that dilutes the bullish sentiment on the stock is the size of the potential market of Plug Power. Analysts have projected the fork-lift market at $2 billion/year or even higher. However, Gales believe that to “justify the kind of long-term growth estimates,” investors have to assume three things; the company will expand market share, it will not be selling shares to raise capital and the potential market will grow substantially.

Gales terms it a “chicken and egg problem,” saying the company “can’t stop diluting shareholders until it can become profitable but it can’t become profitable without raising more money, all at the expense of existing shareholders.”

The expert cautioned the investor from putting money on this stock until the valuation comes down, and the company can prove that it can grow without diluting the shareholders.

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