Actions of Connect the power supply (NASDAQ: CAP) The stock jumped in May after the company announced 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 its pre-announcement level, and a US senator has questioned the loan.
The stock, meanwhile, is now down more than 70% over the past year.
Let’s take a look at the DOE’s proposed loan, why it’s in question, why it’s so important to Plug Power, and whether the stock’s decline is a buying opportunity.
Fixing a broken business model
Plug Power has long struggled with a broken business model, which it decided to fix. The company first found a niche selling fuel cells used in forklifts and other material handling equipment to companies with high-volume warehouses and three shifts like Amazon And Walmart.
But the flaw in its business model was that it was selling the hydrogen needed to power its fuel cells at a loss. This was reflected in the company’s most recent results, where negative numbers Gross margin resulted in a gross loss of $159 million.
Just to highlight how serious the situation is, the loss was measured before any costs to the company. The company is losing a lot of money on the hydrogen it sells, although in the first quarter it also lost money on the equipment it sold.
Of course, acquiring 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. Over the years, the company has mainly obtained hydrogen from third parties and sold it to its customers at a huge loss.
That’s why it set out to build a network of its own hydrogen plants capable of producing fuel that it can sell to its customers for a profit.
This is where the DOE loan comes into play. In May, the company was given the opportunity to obtain the loan – if certain conditions negotiated by the company and the government are met – to help it expand its network of hydrogen plants. If approved, the loan would help finance up to six green hydrogen production facilities.
Plug Power already has two factories operating, with another expected to be completed by the end of the year, which would meet about 65% of expected demand.
The loan would help create a large factory in Texas, planned for next year, that would meet the needs of its customers and allow it to expand beyond.
However, in June, Sen. John Barrasso, a Wyoming Republican who is the ranking member of the Senate Energy and Natural Resources Committee, asked the DOE inspector general to investigate “any potential improprieties” in from the DOE Office of Loan Programs and Loan Program Director Jigar Shah due to possible conflicts of interest. The senator also questioned Plug Power’s viability given its $1.4 billion losses last year.
While Plug Power could seek financing elsewhere if the loan is ultimately not approved, the terms and interest rates would likely be much less favorable. And given the company’s financial situation and its negative operating cash flowthere is no guarantee that she will be able to find an institution to lend her money.
Is selling a buying opportunity?
Plug Power shares soared as much as 70%, to $4.90, the day after the DOE loan offer was announced. Today, it is trading more than 15% below its pre-announcement level.
If the loan is approved, there should be immediate upside potential given the past reaction and current status of the stock. But this could be short-lived.
Plug Power, meanwhile, said it is looking to break even on its gross margin in its fuel business in the fourth quarter, which would not depend on the loan. That is a potential catalyst, but a gross margin breakeven is still not a complete solution, as it will not make the company profitable or start generating cash.
At this point, I would consider Plug Power more of a lottery ticket. If it gets the loan, builds its factories, and posts positive gross margin and free cash flow, the stock price could see significant upside. But like most lottery tickets, there is also a risk that the stock 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
