Plug Power Stock: Changing My Stance (NASDAQ:PLUG)

In an article revealed final January, I concluded that Plug Energy Inc. (NASDAQ:PLUG) has a really fascinating story to inform, however I needed to stay on the sidelines again then as the corporate’s monetary efficiency, in my view, was not as engaging because the story it was promoting. As an investor, I search for a fantastic story that may be backed with numbers. however Plug Energy was lacking the numbers part again then. After revisiting the corporate, I now discover Plug Energy far more engaging than I did final January, and this has prompted me to think about investing in PLUG inventory.

The influence of the Inflation Discount Act of 2022

President Joe Biden signed the Inflation Discount Act of 2022 (IRA) into legislation lately, which is extensively believed as the one greatest local weather bundle within the historical past of the USA. The IRA is not going to simply deal with local weather change but in addition on increasing Medicare advantages, decreasing well being care prices, and creating jobs, however on this evaluation, my focus might be on the local weather change initiatives launched by this laws. Signing the invoice into legislation, President Biden stated:

This invoice is the most important step ahead on local weather ever, and it’ll permit us to boldly take further steps towards assembly all of my local weather objectives.

IRA incorporates clear power tax credit and clear power investments value $369 billion and the invoice targets to cut back greenhouse fuel emissions within the U.S. by a staggering 40% from the 2005 ranges by 2030. Plug Energy CEO Andy Marsh launched a YouTube video yesterday applauding the present administration for passing this invoice and talking on CNBC a couple of days in the past, Mr. Marsh claimed that this invoice will assist Plug Energy shut the hole with conventional power producers. The CEO went on to reassure that Plug Energy is well-positioned to achieve profitability by 2024.

Because the main supplier of hydrogen gas cell options in the USA, coverage selections that help the expansion of fresh power might be a blessing for Plug Energy. That being stated, we have to rigorously have a look at the provisions in IRA to establish whether or not this invoice has the potential to meaningfully influence Plug’s monetary efficiency within the coming years.

Beneath are the important thing takeaways from the clear power provisions included within the Inflation Discount Act.

1. The Act helps a discount in greenhouse fuel emissions whatever the sources used to interchange GHG-emitting power sources. Hydrogen gas cells, carbon sequestration, and standard clear power industries resembling photo voltaic power might be winners because of these provisions. The Act, in different phrases, doesn’t essentially promote hydrogen gas cells over another clear power supply.
2. Certified clear hydrogen producers might be eligible for a tax credit score of between 60 cents and $3 per kilogram of fresh hydrogen throughout a 10-year interval starting on the date such manufacturing facility is positioned in service (by means of 2033). That is in all probability a very powerful coverage resolution for Plug Energy traders.
3. A 30% funding tax credit score for power storage applied sciences constructed by January 1, 2025.
4. Tax credit for the development of carbon seize services.

If we go a step additional, we are able to see that provisions within the IRA will materially profit Plug Energy and the inexperienced hydrogen trade. America is already the most cost effective producer of hydrogen on the earth. In keeping with knowledge from S&P World Platts, the manufacturing value of gray hydrogen ranges between $1.71-$2.18 per kilogram within the U.S. whereas inexperienced hydrogen produced with renewable power and electrolysis prices between $3.73-$6.50 per kilogram. Qualifying firms that make full use of the $3 tax credit score, subsequently, might be well-positioned to instantly compete with gray hydrogen within the coming years. This might be an enormous leap ahead for the inexperienced hydrogen trade as value parity with gray hydrogen will open many new doorways for progress.

Plug Energy’s monetary efficiency wants a lift

Arising with a fantastic story to inform is an effective begin for any firm. Consider Tesla, Inc. (TSLA) a couple of years in the past. The corporate had a fantastic story to inform – one which promised to remodel the worldwide car trade completely with electrical automobiles. Immediately, with Tesla, we’re seeing not simply the story however a notable enchancment in its numbers too. The mixture of a fantastic story and promising numbers has helped Tesla turn out to be essentially the most priceless automotive model this 12 months.

Exhibit 1: Most respected automotive sector manufacturers as of June 2022

That is Tesla for you. Can Plug Energy obtain the same feat? The story is already there however Plug Energy has thus far didn’t turn out to be worthwhile or money circulation optimistic. As (potential) traders, we have to dig deep to know the explanations behind this lackluster bottom-line efficiency on the again of significant income progress.

In the latest quarter, Plug’s prices grew sooner than income, as soon as once more exerting strain on revenue margins on the working stage. Hydrogen procurement prices have dramatically elevated this 12 months with rising pure fuel costs, and this had so much to do with this sharp enhance in Plug Energy’s prices. The provisions included within the Inflation Discount Act are probably to assist the corporate see some enhancements in its working margins within the subsequent 12 months, however for the corporate to actually unlock its potential, Plug Energy’s huge investments in inexperienced hydrogen vegetation must yield optimistic outcomes. The corporate but once more failed to fulfill Wall Avenue expectations within the second quarter, which prolonged the streak of earnings misses to eight consecutive quarters.

Exhibit 2: Earnings shock historical past

From a strategic perspective, I consider Plug Energy is shifting in the best route by specializing in offering complete hydrogen options to its prospects as an alternative of specializing in one side of the worth chain resembling hydrogen gas or gas cell know-how. The draw back to this technique is that Plug Energy must make investments hundreds of thousands of {dollars} to construct manufacturing services to cater to all of the inexperienced hydrogen necessities of its prospects. This technique has thus far saved the corporate’s revenue margins below strain, and I don’t see issues altering within the foreseeable future both. This isn’t a nasty factor. Plug Energy might doubtlessly emerge as the one 360-degree inexperienced hydrogen options supplier on the earth in a couple of years, enabling the corporate to develop from serving the fabric dealing with trade to on-road transportation. This may assist Plug Energy faucet the mass market alternative for clear power options by means of inexperienced hydrogen gas and its gas cell know-how. The inflection level that may change the monetary story of the corporate will happen when Plug expands from the fabric dealing with enterprise to different finish markets that cater to the mass.

Plug Energy’s manufacturing growth plans in Georgia, Louisiana, New York, and Belgium will value the corporate short-term income, nonetheless, the corporate is doing the best factor by unwaveringly specializing in the long-term alternative. Carving out aggressive benefits within the inexperienced hydrogen market, in my view, will pave the best way for Plug Energy to earn good-looking income in the long term.

Takeaway

Plug Energy is more and more changing into investable. Regardless of value pressures, I consider the corporate is far more engaging at the moment than it was final January. With a technique targeted on long-term returns, Plug Energy is headed in the best route to dominate a distinct segment market within the power sector that might quickly show to be a market with a multi-billion-dollar alternative. Favorable coverage selections will speed up Plug Energy’s mass-market entry, and this might function a catalyst in serving to the corporate flip worthwhile.