Plug in the power (NASDAQ: CAP) is one of the most popular stocks in the energy sector. The main attraction lies in the company’s ambitious plans to become a leader in green hydrogen production. This emissions-free fuel could be a game-changer for the environment and the economy, making it a major potential growth driver for Plug Power.
However, given his financial problems, I worry Plug in the power ability to keep its immense promise. For this reason, I will not touch its stock. On the other hand, I am very intrigued by hydrogen potential. This is why I look for companies that could benefit from the growth of this sector. An emerging and fascinating hydrogen stockpile is Brookfield Renewable Energy (NYSE:BEPC)(NYSE:BEP). Here’s why I would buy stocks hand in hand.
Problems with the promise
Plug Power has big ambitions. The company is investing heavily in building a complete hydrogen ecosystem, including production, transportation, storage and distribution systems. These investments brought its revenues to $1.2 billion last year. Plug expects revenue to reach $6 billion by 2027 and $20 billion by 2030. That represents a staggering 50% compound annual growth rate from last year’s level.
However, the company faces a potentially significant problem that could hamper its growth. Short-term challenges in the North American liquid hydrogen market have led to delays and other issues. They also created liquidity problems within the company. It’s gotten to the point where Plug Power issued a warning in November that it may not be able to continue operating. The company said it “anticipates that its existing cash, available-for-sale securities and equity securities will not be sufficient to fund its operations during the next twelve months.”
Because of this, Plug Power needs to raise additional capital to fund its growth, which will likely be very dilutive to existing investors. It is also possible that the company will need to restructure its balance sheet. As a result, there is a real risk that the stock could fall significantly (it has lost almost two-thirds of its value over the past year), or even to zero.
A less risky way to bank on hydrogen
While Plug Power could go bankrupt by going all-in on green hydrogen, Brookfield Renewable is taking a much broader approach to the transition to low-carbon energy. It is a world leader in renewable energy with a diversified portfolio in hydrogen, wind, solar and storage. On top of that, it is investing less in emerging sustainable technologies, including hydrogen.
As a leader in renewable energy, Brookfield will benefit from the growth of green hydrogen, as companies like Plug Power use its emissions-free electricity to power their hydrogen projects. In 2020, Plug Power signed an agreement to source 100% renewable energy from Brookfield to power its first green hydrogen production facility. They also established a broader relationship to pursue new green hydrogen development opportunities. This led to a second agreement for a Brookfield-powered facility in 2021.
In addition to working with Plug, Brookfield Renewable has partnered with Enbridge on a green hydrogen plant in Canada. Enbridge will inject the emissions-free fuel produced at the plant into its natural gas distribution network in Canada. This will help reduce emissions by replacing some natural gas with green hydrogen.
Brookfield has also agreed to invest up to $1 billion in Avaada Ventures Private Limited through its first Global Transition Fund. This investment will help Avaada finance its investments in green hydrogen and ammonia in India.
Unlike Plug Power, Brookfield has the capital to continue investing in green hydrogen projects. The company generates plenty of cash flow and has a strong balance sheet. It also regularly sells assets to recycle capital into higher-yielding opportunities. This gives it great financial flexibility to make new investments. Additionally, the company and its parent company, Brookfield Asset Management, raise a second Global Transition Fund. They hope to raise more than $20 billion, much more than the first fund ($15 billion). This will give Brookfield more capital to invest in energy transition projects, such as green hydrogen.
Higher probability of creating shareholder value
Plug Power has been a terrible investment over the years. The shares have lost 96% of their value since going public in 1999. They could fall further if the company fails to raise the capital it needs to finance its ambitious growth plan. While this growth plan could fuel a stock price rise if Plug hits its revenue targets, the risk of the company failing is high.
On the other hand, Brookfield Renewable is a proven value creator. It has generated a total return of over 230% over the past decade (12.8% annualized). It is in an excellent position to continue creating value for its shareholders in the future, as it expands its renewable energy business and seeks to take advantage of emerging opportunities such as green hydrogen. That’s why I wouldn’t hesitate to buy more shares of Brookfield Renewable.
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Matthew DiLallo holds positions in Brookfield Asset Management, Brookfield Renewable, Brookfield Renewable Partners and Enbridge. The Motley Fool holds positions and recommends Brookfield Asset Management, Brookfield Renewable and Enbridge. The Motley Fool recommends Brookfield Renewable Partners. The Motley Fool has a disclosure policy.
While I won’t touch the plugged-in electricity stock, here’s an emerging hydrogen stock I’d buy in hand was originally published by The Motley Fool
