<p>In September, Plug Power (NASDAQ: PLUG) released its five-year plan, which estimated an annual revenue of $ 1 billion until 2024. With PLUG shares below $ 3 then it was clear that investors simply did not believe that Plug Power would hit that goal .
After all, management led not only $ 1 billion in revenue but big profits. A targeted $ 170 million in operating profit suggested an adjusted earnings per share of at least 45 cents.
I estimated at the time that meeting these targets would move the PLUG stock price to between $ 7 and $ 9. On this site, Luke Lango claimed that although Plug Power’s performance was disappointing, the current fair value was closer to $ 4.
During the five months ago, Plug Power has run well towards that goal. The initial guidance for 2020 looks solid. Investor confidence in these goals – or at least the future of Plug Power – has steadily increased.
But it also has the PLUG share price, which is now over $ 5 at the time of writing. The shares have increased by about 86% since the five-year plan was released. That price, and that rally, suggests potential caution against PLUG stocks – even for investors who are bullish on long-term results.
Plug Power Drives Confidence
To simplify the situation, confidence in these goals increases what has driven the latest rally in PLUG. Again, when Plug Power released the long-term plan on September 18, the stock closed at $ 2.82, after winning 3.7% that day.
Nevertheless, the targets suggested that the share could triple in about five years from that closing price. The price itself showed that investors simply did not believe that Plug Power would deliver.
It was a logical expectation – and it still can be. After all, Plug Power has been a serial disappointment. Incredibly, as Bloomberg noted last year, that company took 20 years just to get a positively adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in a single quarter.
Plug Power has raised – and burned – over $ 1 billion in capital over its history. At the end of the third quarter, Plug Power’s accumulated deficit was $ 1.33 billion.
Meanwhile, the five-year goals have not changed. In fact, Plug Power reiterated these goals in a business update released on January 30th.
Progress 2019 and 2020
What has changed is that investors are pricing an increasing probability that Plug Power will meet these goals or at least come close. And that makes sense.
The business update at the end of January proposes that Plug Power will reach its guidance for 2019. The outlook for 2020 includes adjusted EBITDA of approximately $ 20 million, a nice improvement over the previous year, due to invoicing growth that will exceed 25%. (Invoicing is calculated as revenue plus the net change in deferred revenue. Mainly the amount of transactions taken in during 2020, although part of that business will not be reported as revenue until recent years.)
An order of $ 172 million announced in early January is a nice step towards the company’s goal. Although it appears that the order comes from an existing customer – probably Amazon (NASDAQ: AMZN) or Walmart (NYSE: WMT), both of which own PLUG shares as well – it is still a solid profit and a big contract. That alone suggests annual billing of at least $ 86 million, a significant portion of Plug Power that is $ 1 billion hopes to reach in 2024.
As confidence in the 2024 targets increases, the PLUG share price should also increase. That’s exactly what’s happening. It’s a bit like the gains in Advanced Micro Devices (NASDAQ: AMD).
The company was a serious disappointment: by 2016 declines, the stock had fallen over 95% in about ten years. Investors there expected more of the same, but as the turnaround picked up and new products took off, the AMD stock took off. As long as Plug Power can continue to convert skeptics, its shares may also rise.
Regarding the PLUG share price
The only thing that worries at the moment, however, is how much confidence has been priced by the 86% rally since September, let alone the 311% increase since the beginning of last year.
Again, Plug Power’s target also suggests $ 200 million in adjusted EBITDA and perhaps 50 cents in adjusted EPS. A 20x company value to EBITDA multiple and a 25x price-to-profit multiple can bring the stock to $ 11- $ 12 by 2024. After all, growth does not necessarily stop when and if the goals are achieved.
But even these goals indicate that upwards in PLUG will at least be a little thinner. A share that in September had a way of tripling in four and a half or five years now, in a bullish scenario, may double in four years. The latter performance is attractive, but it is not guaranteed either.
After all, Plug Power still needs a big customer gain in addition to Amazon, Walmart and Procter & Gamble (NYSE: PG). There is still a long way to go from the estimated billing of $ 300 million in 2020 to $ 1 billion in 2024 revenue.
Look at the risk
In other words, risk remains. The company’s history can not be ignored even with improved performance. And yet PLUG, over $ 5, prices much more success and much less risk than six months ago or thirteen months ago.
That alone is not a reason to sell PLUG shares after the rally. It is definitely not a reason to short the stock. But the price means something, and the current price changes history. I have been bullish on PLUG shares back to last year because the upside was so huge. And as Lango noted last year, even missed goals suggested a strong upside in the stock.
Over $ 5 is not necessarily the case either. The upside is attractive, but not what it was last year. If Plug Power misses its target, stocks will stay out or potentially fall from these levels.
Given the company’s inability for two decades to run a consistent cash flow, this was always a high-risk story with high rewards. Investors have responded that recent results have reduced risk. They should also remember that the higher price reduces the reward.
After spending time at a retail broker, Vince Martin has been covering the financial industry for almost a decade for InvestorPlace.com and other stores. He has no positions in any of the mentioned securities.