Walmart is Testing, Europe Might be Next - the Growth Potential for Plug Power Inc. (NASDAQ:PLUG)

Investors looking to hold a company during its high growth period may be interested in Plug Power Inc. (NASDAQ:PLUG). In this article, We will review their business along with the latest Walmart deal, and translate it into an estimate for their growth potential.

Check out our latest fundamental analysis for Plug Power

Business Overview

Plug creates and distributes hydrogen fuel cells to existing vehicles such as forklifts and airport trucks. The company is attempting to expand its market reach to class-A trucks and other vehicles.

The company is utilizing an "end to end" approach, which means that they have a complete production to distribution system for the hydrogen fuel cells. Plug generates the green hydrogen with a PEM electrolyzer from renewable sources, transports it to storage facilities or customers and dispenses it from one of the (currently) 165 hydrogen dispensers in the U.S.

One of the main selling points for Plug, is that companies can use the Plug hydrogen cells in existing (compatible) vehicles as a drop-in replacement. Meaning that companies can just opt to switch to a hydrogen solution and do not need to modify their logistics fleet.

Growth Estimates

Given the application capabilities of the company, wall-street analysts have made future estimates for the company. While Plug is in the early stages of growth development, it is a great time for investors to evaluate.

In the chart below, we can see the average growth estimates from the 27 analysts covering the company.

Analysts are now forecasting revenues of US$916.1m by the end of 2022. This would be a sizeable 82% improvement in sales compared to the last 12 months. Losses, which were exacerbated by the pandemic, are predicted to fall substantially, shrinking 35% to US$0.51.

By the end of 2024, analysts are expecting revenues of US$2.098b and positive net income of US$23.6m. The positive income estimate is crucial, because investors can see when the company is actually expected to validate its business model and become profitable. Breaking even for companies is considered a catalyst that can get the attention of more investors.

Between Profit and Growth

There is an issue however - while Plug is expected to post positive earnings by 2025, the free cash flows are expected to be negative. Ideally, investors would like these two numbers to match, since the free cash flows are the metric that show a company can be self-sustaining and deliver returns to investors.

The negative projected cash flows are a reflection of the required CapEx the company will need in order to grow. This is not a bad thing, but it delays the realistic date at which the company produces cash for investors.

In order for current investors to avoid dilution or added risk by (high) debt financing, we can examine the balance sheet and see how much cash a company has, that can be used as CapEx. The current US$3.87b cash position ensures at least a 3 year of cash in order to fund operations, but the company may need more if it wants to fund the required high growth.

Growth Prospects

The company's client list includes: Amazon, Boeing, The Home Depot, FedEx, Walmart etc. We notice how these are large companies that have logistics chains which could be improved by PlugPower's fuel cells. Given the current state of revenues, it seems that many of these clients are still "testing out" the product, and can be expected to increse purcheses if they are satisfied with the results.

In 2021 Renault (ENXTPA:RNO) announced a partnership with Plug Power, increasing the company's presence in Europe. The project is expected to produce light commercial trucks, which will utilize Plug's hydrogen cells. 

Another deal was announced yesturday with Walmart (NYSE:WMT), where the company gave Walmart the option to deliver up to 20 tons of liquid hydrogen per day to power their lift trucks.

Plug Power is also expanding into Asian markets via South Korea. In 2021, the company announced a joint venture with SK E&S to partner in building a gigafactory, a base for producing mass electrlyzers.

One possible source of expansion can also be the European market, as energy shorteages and calls for increased energy independence by EU politicians may accelerate the development of the hydrogen energy industry. If this happens, then Plug Power will be in a good position to provide or licence-out their hydrogen energy systems.

Conclusion

Investors that are optimistic on the accelerated expansion of Hydrogen Fuel Cells may want to dive deeper into the potential of Plug Power. The company may experience catalysts in European markets and a higher adaption once U.S. clients test out the product.

While Plug Power is projected to grow at a high rate, it will need significant CapEx in order to fund that growth, which is why, while it will likely reach profitability after 2025, the free cash flows are expected to come much later.

Investors should be aware that they are looking at an early stage of a company's development, which even with the potential, will probably need many years to mature. This is why longer-term investment horizons may be a more appropriate strategy in the case of Plug Power.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.