When Plug in the power (NASDAQ: CAP) released its first quarter results, the problems that have plagued the company over the past year remained front and center. Chief among these issues are the company’s negative gross margins and cash outflows.
The stock was down more than 60% over the past year before news that the company received a massive $1.66 billion loan from the Department of Energy (DOE) sent the stock higher shares soar.
Let’s take a look at its most recent quarterly results, its loan approval and why there could be a turnaround in the works.
Problems persist for Plug Power
Plug Power is a fuel cell company that has found a niche selling fuel cells used in forklifts and other material handling equipment that companies such as Amazon And Walmart use in their high volume warehouses. The problem with its business model, however, is that it would sell the hydrogen needed to run its fuel cells at a loss.
This was once again the case in the first quarter, with the company reporting a gross loss of $159.1 million. That’s worse than the $69.4 million gross loss recorded a year ago. This quarter was particularly bad because in addition to having typical negative gross margins on its fuel sales, equipment was negative. gross margins.
Systematically selling fuel with huge negative gross margins is neither a good nor a sustainable business model. Unsurprisingly, the company lost cash, which continued into the first quarter.
Plug Power worked cash outflows of $167.7 million, while its free cash flow was negative $266.4 million. This is actually a nice improvement over last year, when its operating cash outflows were $276.9 million. However, much of the improvement came from a change in accounts receivable, as it allowed more debt to be collected from customers. Other than that, nothing has changed in the underlying business and the amount customers now owe the company has been reduced.
Plug Power seeks to solve its problems
In order to solve its current problems with gross margins and negative cash flow, Plug Power has started building its own green hydrogen production facilities in order to reduce costs and be able to sell the green hydrogen it produces at a profit .
The company said its two facilities in Georgia and Tennessee are now producing hydrogen at design capacity (the production expected under ideal conditions). Together they can produce 25 tonnes per day (TPD) of liquid hydrogen. Meanwhile, Plug Power’s Louisiana factory building is on track to be completed and begin production by the end of this year. Once the Louisiana plant is operational, the company said it should be able to meet most of its customers’ hydrogen demands in-house. However, after an expected growth in customer demand to 65 TPD, its own supply capacity would drop to around 65% of its own customer demand.
Plug Power also said it was preparing to raise prices this year, particularly for hydrogen. This should improve its margins in the coming quarters. The objective is to break even in the gross margin of its fuel business in the fourth quarter.
Achieving profitable fuel gross margins alone would not solve all of Plug Power’s problems. Equipment gross margins were negative this quarter and only about 13% a year ago. And even with cost cuts, its operating expenses came in at around $100 million in the most recent quarter, so it might still be a long way from becoming profitable.
However, the company is showing some signs that it is possible to turn a corner. It still has a large hydrogen plant in Texas planned for next year, and it just received a commitment for a $1.66 billion low-interest loan from the DOE. The loan will help it complete this project and build other green hydrogen facilities across the United States. Once the Texas facility is complete, it should have enough capacity to supply all of its current customers with its own production, then begin expanding beyond with help from the loan. The loan can be used to build up to six facilities, giving it plenty of room to grow.
Plug Power is a speculative investment
Any investment in Plug Power is still very speculative at this point. The company just reported terrible first quarter results and diluted its shareholders by issuing shares using an at-the-market program. It also doesn’t have the best record of keeping its promises, as evidenced by persistent delays at its hydrogen plants.
There are, however, some early signs of a turnaround. Reducing dependence on third-party hydrogen and increasing prices is a big step in the right direction. Meanwhile, the DOE loan will now provide it with low-cost financing to help it expand its network of hydrogen plants. This is necessary to change the economics of its business and is therefore a huge deal.
Things are looking up for Plug Power, but it’s a stock only suitable for aggressive investors.
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Plug Power continues to burn through cash, but there are signs of a turnaround after the DOE loan commitment. Is it time to buy the stocks? was originally published by The Motley Fool
