Shares of Plug Power (PLUG -5.29%) surged in May after the company announced that it had received a conditional commitment for a $1.66 billion loan from the U.S. Department of Energy (DOE). However, the stock is now well below where it was before the announcement, and one U.S. senator has called the loan into question.
The stock, meanwhile, is now down over 70% in the past year.
Let’s look at the proposed DOE loan, why it is being called into question, why it is so important for Plug Power, and whether the slide in the stock is a buying opportunity.
Fixing a flawed business model
Plug Power has long been grappling with a flawed business model, which it has set out to fix. The company initially found a niche selling fuel cells used in forklifts and other material-handling equipment to companies with high-volume, three-shift warehouses like Amazon and Walmart.
But the flaw in its business model was that it would sell the hydrogen fuel needed to run its fuel cells at a loss. This could be seen in the company’s most recent results, where negative gross margin led to a $159 million gross loss.
Just to emphasize how bad this is, the loss was measured before any corporate costs. The company loses a lot of money on the hydrogen fuel it sells, although in the first quarter, it also lost money on the equipment it sold.
Obviously, acquiring or making something for $3 and then selling it for $1 is not a durable business model, but that is pretty close to what Plug Power did last quarter with hydrogen fuel. Over the years, the company has mostly obtained hydrogen from third parties and sold it to its customers at a huge loss.
This is why it has embarked on building a network of its own hydrogen plants that can produce fuel that it can sell to its customers for a profit.
This is where the DOE loan comes in. In May, the company was given the chance to secure the loan — if certain conditions to be negotiated by the company and the government are met — to help it build out its hydrogen plant network. If it is approved, the loan would help fund up to six green hydrogen production facilities.
Plug Power already has two plants up and running, and another is expected to be complete by the end of the year, and that would meet about 65% of where it sees demand headed.
The loan would help create a large plant in Texas scheduled for next year that would meet its customer needs and allow it to expand beyond that.
However, in June, Sen. John Barrasso, a Republican from Wyoming who is the ranking member of the Senate Committee on Energy and Natural Resources, asked the DOE’s inspector general to investigate “any potential impropriety” by the the DOE’s Loan Programs Office and the loan program’s director, Jigar Shah, due to possible conflicts of interest. The senator also questioned Plug Power’s viability given its $1.4 billion in losses last year.
While Plug Power could pursue financing elsewhere if the loan ultimately does not get approved, the terms and interest rates would undoubtedly be much less favorable. And given the company’s financial position and negative operating cash flow, there is no guarantee it would be able to find an institution to lend it the money.
Is the sell-off a buying opportunity?
Plug Power shares shot up as much as 70%, to $4.90, in the day after the DOE loan offer was announced. Today it is trading more than 15% below where it was before the announcement.
If the loan is approved, there should be some immediate upside potential given the past reaction and where the stock now trades. However, that could be short-lived.
Plug Power, meanwhile, has said it is looking to get to gross margin breakeven in its fuel business in the fourth quarter, which would not be dependent on the loan. That is a potential catalyst, but a break-even gross margin is still not a complete solution because it will not make the company profitable or start generating cash.
At this point, I would view Plug Power more like a lottery ticket. If it gets the loan, builds out its plants, and turns positive in gross margin and free cash flow, there could be tremendous upside in the stock. But just like most lottery tickets, there is also the chance it becomes worthless.
