If you listen Plug in the power‘s (NASDAQ: CAP) management team, there are a ton of long-term benefits for the company’s business. Billions of dollars are currently being invested in renewable technologies, including hydrogen fuel cells, in which Plug Power specializes. There’s a case to be made that the company is poised to ride a tidal wave of investor interest.
Analysts at Goldman Sachs I’m not so sure. In fact, according to a new study, there’s one factor in particular that worries them.
Goldman Sachs Analysts Are Worried About This One Thing
Plug Power relies entirely on hydrogen fuel cell technology. The company was founded in 1997 for this purpose. Hydrogen fuel cells are electrochemical units that combine hydrogen and oxygen atoms to produce energy. Hydrogen fuel cells are already used on a small scale in power plants, vehicles, spacecraft, computers and cell phones. The question is not whether the technology works, but whether it works at scale at an economical price.
According to the U.S. Department of Energy, “to be competitive in the marketplace, the cost of fuel cells will need to decrease significantly without compromising performance.” When could costs drop enough to make hydrogen a viable fuel source for major parts of the global economy? It’s hard to say, but there’s a good chance this tipping point won’t happen this decade.
Some research indicates that, even assuming regulatory tailwinds, such as increased subsidies and a carbon tax, hydrogen fuel cells may not be competitive until the 2030s. According to international consultancy McKinsey, ” the industry is expected to drive the majority of clean hydrogen use through 2030, followed by wider adoption in new applications by 2050.” So there will be growth in demand over this decade, but the main growth drivers for hydrogen fuel will be in the decades to come.
This brings us to Goldman Sachs and its recent research note on Plug Power stock. The company’s forecast asserts that investors will remain skeptical of the longest-duration pockets of the stock market. Basically what analysts are saying is that companies with cash flows far into the future will struggle in today’s market.
This makes a lot of sense. Given the uncertainty in both the economy and interest rates, these far-flung cash flows will be extremely sensitive to changes in investor expectations. Goldman Sachs estimates that Plug Power has an ownership life of 25.8 years. This is roughly the weighted average of the company’s expected cash flows.
“The higher cost of capital has led investors to scrutinize unprofitable or highly leveraged stocks,” conclude Goldman Sachs analysts. This will be a problem for Plug Power. Its capital expenditures are increasing as the company attempts to expand its operations. Meanwhile, key drivers of demand for its products could still be years or even decades away. Plug Power may be tapping into a potentially huge market, but the gap between now and when that market materializes may be too great in a market where the cost of capital is high and investors are reluctant to bet on distant cash flows.
Is Plug Power stock a buy, hold or sell?
There is no doubt that the demand for hydrogen fuel cells will grow in the coming decades. Last year, approximately $1.7 trillion was invested in clean energy initiatives. But the vast majority of that money has gone toward already economically viable energy sources, like wind and solar. Hydrogen may see its day in the sun, but it won’t be in 2024. It may not even be this decade.
Even if Plug Power does everything right, it could struggle to survive financially until demand drivers pick up significantly. The company is already massively diluting its shareholders through a billion-dollar stock issuance program, and last year it issued a business continuity notice — it’s an accountant’s way of warning that a company may soon become insolvent.
Plug Power is stuck between a rock and a hard place. It is currently experiencing financial difficulties, but its main demand drivers will not appear soon. For this reason, it’s probably best to stay away from this volatile stock.
Should you invest $1,000 in Plug Power right now?
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool holds positions with and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
1 Reason Goldman Sachs Analysts Are Skeptical of Power Plug Stock was originally published by The Motley Fool
