With a Senator Questioning Plug Power’s Government Loan, Is This an Opportunity to Buy the Stock?

Shares of Plug Power (NASDAQ: PLUG) surged in May after the corporate announced that it had received a conditional commitment for a $1.66 billion loan from the U.S. Department of Energy (DOE). Nevertheless, the stock is now well below where it was before the announcement, and one U.S. senator has called the loan into query.

The stock, meanwhile, is now down over 70% prior to now yr.

Let us take a look at the proposed DOE loan, why it’s being called into query, why it’s so necessary for Plug Power, and whether the slide within the stock is a buying opportunity.

Fixing a flawed business model

Plug Power has long been grappling with a flawed business model, which it has got down to fix. The corporate initially found a distinct segment selling fuel cells utilized in forklifts and other material-handling equipment to corporations with high-volume, three-shift warehouses like Amazon and Walmart.

However the flaw in its business model was that it could sell the hydrogen fuel needed to run its fuel cells at a loss. This may very well be seen in the corporate’s most up-to-date results, where negative gross margin led to a $159 million gross loss.

Just to emphasise how bad that is, the loss was measured before any corporate costs. The corporate loses loads of money on the hydrogen fuel it sells, although in the primary quarter, it also lost money on the equipment it sold.

Obviously, acquiring or making something for $3 after which selling it for $1 will not be a durable business model, but that’s pretty near what Plug Power did last quarter with hydrogen fuel. Over time, the corporate has mostly obtained hydrogen from third parties and sold it to its customers at an enormous loss.

This is the reason it has launched into constructing a network of its own hydrogen plants that may produce fuel that it may sell to its customers for a profit.

That is where the DOE loan is available in. In May, the corporate was given the prospect to secure the loan — if certain conditions to be negotiated by the corporate and the federal government are met — to assist it construct out its hydrogen plant network. Whether it is approved, the loan would help fund as much as six green hydrogen production facilities.

Plug Power already has two plants up and running, and one other is anticipated to be complete by the top of the yr, and that may meet about 65% of where it sees demand headed.

The loan would help create a big plant in Texas scheduled for next yr that may meet its customer needs and permit it to expand beyond that.

Nevertheless, in June, Sen. John Barrasso, a Republican from Wyoming who’s the rating member of the Senate Committee on Energy and Natural Resources, asked the DOE’s inspector general to analyze “any potential impropriety” by the the DOE’s Loan Programs Office and the loan program’s director, Jigar Shah, as a consequence of possible conflicts of interest. The senator also questioned Plug Power’s viability given its $1.4 billion in losses last yr.

While Plug Power could pursue financing elsewhere if the loan ultimately doesn’t get approved, the terms and rates of interest would undoubtedly be much less favorable. And given the corporate’s financial position and negative operating money flow, there isn’t any guarantee it could give you the option to seek out an establishment to lend it the cash.

Image source: Getty Images.

Is the sell-off a buying opportunity?

Plug Power shares shot up as much as 70%, to $4.90, within the day after the DOE loan offer was announced. Today it’s trading greater than 15% below where it was before the announcement.

If the loan is approved, there must be some immediate upside potential given the past response and where the stock now trades. Nevertheless, that may very well be short-lived.

Plug Power, meanwhile, has said it’s trying to get to gross margin breakeven in its fuel business within the fourth quarter, which might not be depending on the loan. That could be a potential catalyst, but a break-even gross margin continues to be not a whole solution because it is going to not make the corporate profitable or start generating money.

At this point, I might view Plug Power more like a lottery ticket. If it gets the loan, builds out its plants, and turns positive in gross margin and free money flow, there may very well be tremendous upside within the stock. But identical to most lottery tickets, there may be also the prospect it becomes worthless.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Amazon and Walmart. The Motley Idiot has a disclosure policy.

With a Senator Questioning Plug Power’s Government Loan, Is This an Opportunity to Buy the Stock? was originally published by The Motley Idiot

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