Shares of Plug power (NASDAQ: PLUG) rose in May after the company announced it had received a conditional commitment for a $1.66 billion loan from the US Department of Energy (DOE). However, the stock is now well below where it was before the announcement, and a US senator has questioned the credit.
The stock, meanwhile, is now down more than 70% in the past year.
Let’s look at the proposed DOE loan, why it’s in question, why it’s so important to Plug Power, and whether the stock slide is a buying opportunity.
Fixing a flawed business model
Plug Power has long been dealing with a flawed business model, which it has set out to fix. The company first found a niche selling fuel cells used in forklifts and other material handling equipment to companies with high-volume, three-shift warehouses such as Amazon AND Walmart.
But the flaw in its business model was that it would sell the hydrogen fuel needed to operate the fuel cells at a loss. This can be seen in the company’s most recent results, where the negative gross margin led to a gross loss of $159 million.
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.
Of course, buying or making something for $3 and then selling it for $1 isn’t a sustainable business model, but it’s pretty close to what Plug Power did last quarter with hydrogen fuel. Over the years, the company has mostly sourced hydrogen from third parties and sold it to its customers at a huge loss.
That’s why it has started building a network of its own hydrogen plants that can produce fuel 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 — subject to certain conditions to be negotiated by the company and the government — to help it build its hydrogen plant network. If approved, the loan will help finance up to six green hydrogen production facilities.
Plug Power already has two plants in operation and another one expected to be completed by the end of the year, and that would meet about 65% of where it sees directed demand.
The loan would help set up a large plant in Texas planned for next year that would meet the needs of its customers 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 Energy and Natural Resources Committee, asked the DOE inspector general to investigate “any potential improprieties” by the Office of DOE Loan Programs and director of the loan program, Jigar Shah, due to potential 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 is ultimately not approved, the terms and interest rates would obviously be much less favorable. And given the company’s financial position and negative operating cash flow, there is no guarantee that it will be able to find an institution to lend it the money.
Is the sale a buying opportunity?
Plug Power shares rose as much as 70% to $4.90 a 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 immediate upside potential given the past reaction and where the stock is trading now. However, this may be short-lived.
Plug Power, meanwhile, has said it is looking to reach gross margin in the fuel business in the fourth quarter, which will not depend on credit. This is a potential catalyst, but an unfavorable 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 look at Plug Power more like a lottery ticket. If it gets the loan, builds its factories, and turns positive in gross margin and free cash flow, there could be a tremendous upside to the stock. But like most lottery tickets, there is a chance that they will become worthless.
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With a senator questioning Plug Power’s government loan, is this an opportunity to buy the stock? was originally published by The Motley Fool