Sometimes it’s not enough to read a company’s quarterly earnings release and listen to the accompanying conference call. Plug Power’s (NASDAQ:PLUG) third-quarter 2023 results and remarks provide a textbook example of why prudent investors must always read corporate filings with the Security and Exchange Commission (SEC) — including the fine print.
In this instance, I literally mean the fine print, as Plug Power made a bombshell statement in a font size that required a magnifying glass. Nonetheless, investors picked up on Plug Power’s big warning and unceremoniously unplugged their portfolios from PLUG stock.
Like a popped balloon
Although 2020 and 2021 might feel like a million years ago, it was just a few years ago when interest rates were low and speculative fervor ran high in the financial markets. Additionally, governments around the world were going all-in on clean-energy initiatives at that time.
What could possibly go wrong then? PLUG stock sailed to $67 in early 2021 on the hope that the company’s hydrogen fuel-cell technology would power the world’s vehicles and machinery. To quote these oft-cited famous last words, “It seemed like a good idea at the time.”
Maybe it was a good idea for a hot minute, since it felt like low interest-rate policy would last forever. Besides, inflation wasn’t high, and there was relative peace abroad. The scene was set for Plug Power to benefit from the Inflation Reduction Act, low borrowing costs and the general sense of optimism surrounding new-energy businesses.
Fast-forward to 2022, and high-flying NASDAQ stocks suddenly fell out of favor. Now in 2023, the market has little appetite for unprofitable start-ups like Plug Power, especially after the company posted many consecutive quarterly earnings misses.
With that, PLUG stock slid to the $6 area in the early days of November 2023. Still, Wall Street wasn’t anymore pessimistic than usual as Plug Power prepared to release its third-quarter earnings results.
As it turned out, Plug Power reported $198.711 million in net revenue, showing a decent improvement over the year-earlier quarter’s $188.628 million. On the other hand, the company reported an earnings loss of 47 cents per share, versus the year-earlier loss of 30 cents per share. Furthermore, this EPS result fell short of Wall Street’s call for a loss of 30 cents per share.
Should Plug Power’s disappointing EPS result have been enough to prompt a 40% share-price drop though? Surely, there must have been something else going on, as earnings misses are common (especially for Plug Power) and PLUG stock already traded at a substantial discount — or so it seemed, at least.
Those two dreadful words: “Going concern”
In many cases, the worst words to find in an SEC filing could be “bankruptcy” or “Chapter 11.” However, Plug Power invoked the next-worst phrase on Wall Street: “going concern.”
Again, it’s not enough for investors to comb through a company’s press release and conference-call transcript. Those are useful, but they don’t always tell the full story.
In this case, Plug Power’s third-quarter earnings release did include the aforementioned EPS result and a warning that its “financial performance has been negatively impacted by unprecedented supply challenges in the hydrogen network in North America.” However, Plug Power also tried to reassure investors that “this hydrogen supply challenge is a transitory issue.”
Meanwhile, company management seemed sanguine enough during the earnings call. Nowhere did Plug Power’s executives suggest that the company might run out of money soon.
However, there were red flags for those whose eyes were strong enough to read the startling stats. Specifically, Plug Power’s press release listed its total cash and cash equivalents as $110.809 million as of Sept. 30, 2023. In contrast, the company’s cash and cash equivalents totaled $690.63 million as of Dec. 31, 2022.
In other words, Plug Power’s capital position was in free fall. Consequently, the company added this alarming statement to its third-quarter 2023 Form 10-Q filing:
In light of the Company’s projected capital expenditure and operating requirements under its current business plan, the Company is projecting that its existing cash and available for sale and equity securities will not be sufficient to fund its operations through the next twelve months from the date of issuance of this Quarterly Report on Form 10-Q.
Thus, unless something changes, Plug Power expects to run out of capital within a year.
In case that wasn’t enough to scare investors away, Plug Power then added, “These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern.”
Seasoned investors have seen this movie before, and it usually doesn’t have a happy ending. The next phase may be Chapter 11 or, in a more optimistic scenario, a buyout. Hence, at this point PLUG stock is best left to the short-term traders and speculators, while prudent investors can simply watch events unfold from the sidelines.
