Plug Power Inc. (PLUG, Financial) is a global company specializing in developing scalable, end-to-end hydrogen solutions.
In part one of this analysis, I discussed the company's technology, business model, products and partnerships.
I will now look at its recent acquisitions, manufacturing supply chains, customers, financials, competitors, overall strengths and weaknesses, opportunities and threats, as well as provide a conclusion for investors.
Acquisitions
Plug’s business model has revolved around acquisitions. Its first few sets of acquisitions provided hydrogen plants, stack technology and large-scale electrolyser systems. The company has undergone three acquisitions in the past two years.
In the fourth quarter of 2021, Plug acquired Applied Cryo, which manufactures engineered equipment for multiple applications, including cryogenic trailers and mobile storage equipment for the oil and gas markets and equipment for the distribution of liquified hydrogen, oxygen, argon, nitrogen and other cryogenic gases.
In the same period, the company bought Frames Group, a leader in turnkey systems integration for the energy sector and designs, builds and delivers processing equipment, separation technologies, flow control and safeguarding systems, renewable energy and water solutions.
A year later in the first quarter of 2022, Plug acquired Joule Processing, a process solution and engineered equipment provider. Plug claims the cryogenic process technology that Joule developed for the gas processing industry is directly applicable to hydrogen liquefaction and has the potential to reduce the cost of liquified hydrogen by 25%.
These acquisitions are expected to further establish a pathway for Plug to transition from low-carbon to zero-carbon hydrogen solutions.
Manufacturing and supply chains
Plug manufactures commercially viable products in New York, Houston and Spokane, Washington, as well as supports liquid hydrogen generation and logistics in Charleston, Tennessee. In March 2022, Plug opened its European headquarters in Duisberg, Germany.
Components are sourced from various companies. For instance, Ballard fuel cell stacks are used in GenDrive.
Products and solutions are provided worldwide through direct sales and leveraging relationships with original equipment manufacturers and their dealer networks. Plug is attempting to target markets in Asia, Australia, Europe, the Middle East and North America.
Source: Plug Point
Revenue and expenses
Sales of fuel cell systems, related infrastructure and equipment comprised most of the company's revenue. In the fiscal year ended Dec. 31, 2021, this increased $487.1 million, or 516.5%, to $392.8 million from $94.3 million in the fiscal year ended Dec.31, 2020.
Similarly, cost of revenue from sales of fuel cell systems, related infrastructure and equipment was the highest. For fiscal 2021, cost of revenues due to this increased $135.8 million, or 79.2%, to $307.2 million, compared to $171.4 million the year prior. This was primarily due to an increase in the number of GenDrive units and hydrogen infrastructure installations.
Research and development is a major expense, increasing by 132.6% between 2020 and 2021. This is used to fund development and prototype units, cash and non-cash compensation and benefits for engineering and related staff, expenses for contract engineers, consultancy fees, materials and supplies consumed, facility-related costs and other general costs.
Competitors
The hydrogen industry is extremely competitive, with many well-established companies.
Among multi-sector companies, Linde PLC (LIN, Financial) is a major competitor. It serves a variety of end markets, from food and beverage to metals and mining. It also has exposure to hydrogen for clean fuels as it generates, delivers and stores hydrogen.
Reliance Industries, an Indian multinational conglomerate company, is another major competitor. It is one of the world’s largest producers of grey hydrogen, but as of June 2022, has begun the transition to green hydrogen and is expecting to complete this transition by 2025.
Shell (SHEL, Financial) is another competitor involved in large-scale green hydrogen projects. It is currently in the process of developing Europe’s largest green hydrogen plant in the Netherlands, which is expected to be 10 times greater than Europe’s current biggest plant.
Notably, these companies (probably due to their diversification) do not provide end-to-end solutions like Plug does.
Among its competitors in green hydrogen-focused companies is FuelCell Energy (FCEL, Financial), a global manufacturer of fuel cells and electrolysers. It provides solutions for both decarbonizing electricity and generating hydrogen. It has various fuel cell platforms, including carbonate fuel cell platforms and solid oxide fuel cell platforms.
Nel Hydrogen (OSL:NEL, Financial) is another competitor. Similarly to Plug Power, it provides end-to-end solutions for hydrogen power with plants across Europe. It recently opened one in South Korea as well.
Fusion Fuel (HTOO, Financial) is another green hydrogen company that has a long history within the solar industry and developing photovoltaic technology. Its unique selling point is the photoelectric hydrogen generator, which it says is a “radically different solution that opens the door to cost-competitive, grid-independent green hydrogen production.” HEVOs are designed to work with solar panels to leverage solar energy to produce green hydrogen.
While there are a number of other competitors, most of these companies do not provide end-to-end services and Plug appears to also have a better corporate reputation.
Customers
Plug’s vertically integrated GenKey solution provides all the elements to power, fuel and service its customers, which includ Amazon (AMZN, Financial), The Home Depot (HD, Financial), Southern Co. (SO, Financial), BMW, Carrefour and Walmart (WMT, Financial). Plug focus on creating strong relationships with customers who value high-asset utilisation, increased reliability, efficiency, and zero-emission power solutions.
In fiscal 2021, Amazon accounted for 40.8% of Plug’s total revenue. Another 34.9% was contributed by two other customers. This amounts to 75.7% of total revenue under the control of three customers. While these are likely long-term contracts, once they end the customers are able to go to a competitor company or stop buying. This would result in a decline in revenue, as well as a likely decline in share price.
Volatility in commodity prices
Platinum and iridium are key materials within the polymer electrolyte membrane fuel cells and electrolysers. They are both scarce resources that may become more difficult to source due to cost, geopolitical tensions or other factors. This would affect Plug’s ability to produce commercially viable fuel cell systems, electrolysers and its hydrogen production facilities.
Issues with international expansion
Plug is attempting to expand into other international markets. This presents several problems with international business in general, including securing relationships with foreign subdistributors and manufacturing products which meet foreign regulatory and commercial requirements.
Risks with joint ventures
A large component of Plug’s business model relies on joint ventures with other companies, including SK E&S, Renault and Acciona. They present inherent risks as these companies may have goals that are inconsistent with Plug. For instance, SK E&S retains 51% ownership of the joint venture, which indicates higher risk than the other ventures.
Legal proceedings
Plug has been subject to several legal proceedings over the past two years. There appears to be an ongoing dispute regarding insider trading.
Strengths
The company has several factors in its favor.
First, Plug created the first commercially viable market for hydrogen fuel cells. Further research and design will make fuel cells and electrolysers more efficient, while end-to-end solutions mean consumers are likely to go to it for all their needs.
In addition, acquisitions and strategic partnerships mean Plug is likely to strengthen its existing business and undergo market diversification.
Weaknesses
That being said, green hydrogen is still expensive and inefficient. Transport is highly inefficient too.
There does not seem to be a technology which is unique to the company as its electrolysers and fuel cells do not appear to have a unique selling point.
Opportunities
There are several growth opportunites for Plug Power as well.
For instance, further expansion into different sectors and markets, such as hydrogen for heating and introducing non-hydrogen products, will diversify its customer base.
Additionally, an acquisition or partnership with a major renewable energy producer could reduce prices for green hydrogen and increase research for the efficient use of oxygen byproducts. The creation of more long-term contracts will also help to guarantee sales.
Due to the Inflation Reduction Act, there will likely be increased demand for green hydrogen.
Threats
Investors should take these positives with a grain of salt, however, as ther are a number of factors working against Plug Power.
First, in addition to issues with international expansion, only three customers comprise over 75% of total revenue. Losing only one would have a trememdous impact on its revenue.
There is also volatility with commodity prices. If hydrogen does not catch on, the business will suffer. Further, a cheaper energy vector alternative may become available.
Finally, if Plug is found guilty for the insider trading lawsuit, it could result in a drop in share price and damage its reputation.
Conclusion
Plug’s wide array of products and services mean that it is exposed to a large customer base and is a pure-play bet on the hydrogen economy and is more diversified than other players in the sector. The stock could prove to be an important, niche long-term investment. It is worth adding to your watchlist.
