Jul. 07, 2021, Livy Investment Research (Research Analyst, Long Only, Event Driven, Value, Contributor Since 2021)
- The hydrogen industry has garnered unprecedented interest in the past year due to global urgency in combating climate change through decarbonization.
- The anticipated surge in demand for hydrogen means abundant growth opportunities for industry veterans, including Plug Power ("PLUG").
- PLUG currently provides hydrogen solutions to the industrial sector, and is working on extending its hydrogen fuel cell technology application to on-road electric vehicles and aircrafts in the long run.
- The company is also committed to expanding its green hydrogen production capacity to 500 tons per day by 2025 and 1,000 tons per day by 2028 to support ongoing global decarbonization efforts.
- Based on PLUG's current business plan, we are confident that the company will become profitable and global within the next five years, with promising upside potential of at least 45% to its price performance in the near term.
The Leaders Summit on Climate that took place in April has been synonymous with an inflection point for global efforts towards climate change. Led by the Biden Administration, the U.S. has pledged to reduce greenhouse gas emissions by at least 50% below 2005 levels by the end of the decade; the leading economy’s commitment to decarbonization is also evidenced through the cancellation of key pipeline build-outs and proposal of material investments into improving infrastructure needed to propel the growth of America’s electric vehicle ecosystem. Even China - the fastest growing emerging market in the world - has pledged to attain net-zero emissions by 2060.
The shift in global behaviour towards decarbonization has accelerated demand for green energy solutions like hydrogen, leading to unprecedented interest on the emerging sector. Hydrogen demand in the U.S. alone is forecasted to reach 17 million metric tons by the end of the decade, and further climb towards 63 million metric tons by 2050, representing market growth of more than 6x based on 10 million metric tons of annual usage recorded in 2020. The anticipated demand for hydrogen means abundant growth opportunities for industry players, including Plug Power (NASDAQ: PLUG).
Having established a reputation for providing reliable hydrogen and fuel cell products and solutions in the industry, PLUG is expected to be a key contributor to the growing green hydrogen sector both domestically in the U.S. and globally. The company currently holds capabilities in the generation, liquefaction and distribution of hydrogen fuel through their proprietary hydrogen fueling stations, electrolyzers and fuel cell products, which have been critical to the material handling industry. Having already proved its hydrogen fuel cell technology’s capability in powering electric industrial vehicles, PLUG is now working on extending its product’s application onto on-road electric vehicles to capitalize on the growing opportunities within the industry. Considering the global emissions reduction tailwinds, combined with the company’s years of experience in the industry and its goals of becoming a global green hydrogen solution one-stop-shop provider in the long run, PLUG is expected to see rapid global adoption and profitability within the next five years.
Why PLUG Matters
PLUG’s key hydrogen product and solution offerings currently include the following:
GenDrive – A hydrogen-fueled polymer electrolyte membrane (“PEM”) fuel cell system used in powering material handling industrial vehicles, including electric forklifts, Automated Guided Vehicles and ground support equipment
GenFuel – A liquid hydrogen fueling delivery, generation, storage and dispensing system that could be installed on client-site to facility refueling of hydrogen fuel cells
GenSure – A stationary fuel cell solution that supports the power requirements of the telecommunications and utility sectors; examples of GenSure application include serving as back-up power generators for data centers and power grids
ProGen – A fuel cell engine technology currently used in mobility and stationary fuel cell systems, as well as engines in electric delivery vans
GenFuel Electrolyzers – A modular and scalable hydrogen generator that splits water using renewable energy inputs, such as solar or wind power, into green hydrogen and oxygen through a process called “electrolysis”
GenCare – An internet-of-things-based maintenance and on-site servicing program for the GenDrive, GenSure, GenFuel and ProGen systems
GenKey – A vertically integrated turnkey solution that bundles PLUG’s product and service offerings based on customer needs
Based on the brief overview of PLUG’s product and service offerings above, it is evident that the company encompasses a total system - from hydrogen generation, hydrogen fuel delivery and fuel cell application to after-market services - that is critical to its customers’ long-term decarbonization needs. And PLUG is eager to further maximize hydrogen’s diverse application potential by extending the use of its existing hydrogen fuel cell technology to on-road electric vehicles and short-haul airliners.
Increasing Needs for Hydrogen Generation
With the ongoing transition from low-emission to zero-emission energy sources to combat climate change, the upstream market for hydrogen generation is slated for accelerated growth in order to keep up with global market demands. As one of the most abundant resources in the world, hydrogen will extend from its traditional uses in the industrial sector for oil refining, fertilizer manufacturing and chemical production to new uses as a primary green energy source through synthetic fuel and fuel cell application. As mentioned in earlier sections, hydrogen demand in the U.S. alone could increase up to 17 million metric tons by 2025 and 63 million metric tons by 2050. The heightened demand will in turn result in rapid growth within the hydrogen generation sector at a compounded annual growth rate (“CAGR”) of at least 9.2% into 2025, resulting in a forecasted market value of $201 billion.
In order to capitalize on the growing opportunities in hydrogen generation, PLUG has added GenFuel Electrolyzers to its list of offerings in 2020. The modular and scalable hydrogen generators are capable of producing clean hydrogen on client-site through a process called “electrolysis”, where water is separated into hydrogen and oxygen using renewable electricity, which results in zero carbon emissions. Demand for PLUG’s GenFuel Electrolyzers has already started to ramp up, with one of its pedestal customers, Amazon.com (NASDAQ: AMZN), also signing up for this product to complement their existing fleet of PLUG fuel cells.
To further its footprint in green hydrogen generation and capitalize on the growing market, PLUG has also committed to increasing its hydrogen generation targets to 500 tons per day by 2025 and 1,000 tons per day before 2028. And in order to achieve these goals, PLUG has entered into strategic partnerships with Brookfield Renewable Partners (NYSE: BEP) and Apex Clean Energy to facilitate its build-out of multiple green hydrogen generation plants across the U.S. by the end of 2022. The joint partnerships will provide PLUG with access to affordable renewable energy sources needed for the generation of low-cost green hydrogen, which will be used to support decarbonization efforts across the Northeast and the mid-Atlantic.
Growing Demands for Hydrogen Fuel Cells in Transportation
In addition to industrial and commercial machinery, hydrogen is also becoming a highly sought-after commodity in the automotive and aviation industries. The automotive fuel cell market is forecasted to surge at a CAGR of 53.5% into 2028, resulting in a projected global market value of close to $35 billion. The accelerated growth is encouraged by soaring global demands for electric vehicles, which is expected to outpace gasoline engines by the end of the decade. Similar to battery-powered electric vehicles, fuel cell-powered electric vehicles also produce zero-emissions. Instead of drawing power from a built-in charged battery, fuel cell electric vehicles are powered by converting hydrogen fuel into electricity through a reaction with oxygen in the fuel cell; essentially, the fuel cell serves as an in-car power plant that runs off of hydrogen fuel, and only emits water vapor in the process of producing electricity to power the vehicle’s electric motor.
As mentioned in our brief overview of PLUG’s current offerings, the company has already mastered the application of fuel cell technology in powering material handling industrial vehicles, and has expertise in the design and construction of infrastructure needed for the production, storage and distribution of hydrogen fuel. And recognizing the growing needs for similar technology in the electric vehicles industry, PLUG has already started working on the expansion of their existing fuel cell technology onto on-road applications to secure their market share in the growing EV sector.
PLUG has also been working on extending their fuel cell technology’s application to aircraft. The company is currently in process of materializing plans to deploy fuel cell-powered planes by 2025 to facilitate short-duration flights. The launch of this technology will be a game-changer in the industry, especially when aviation currently accounts for 3% of global CO2 emissions. Even German Chancellor Angela Merkel’s government has recently agreed on a government-mandated roadmap for the development of green synthetic fuel for airliners as part of the nation’s ongoing efforts in curbing carbon emissions. Considering the global market for hydrogen aircraft is expected to grow at a CAGR of more than 48% to a projected market value of $7.4 billion by the end of the decade, - a similar growth trajectory as the automotive fuel cell market - it is evident that PLUG’s management is committed to generating long-term growth and value for investors through pioneering the development of technology needed to support future power requirements while leveraging its existing resources.
Global Adoption of PLUG Offerings
Considering the increasing global demand for hydrogen underpinned by aggressive decarbonization targets set out by corporations and governments, combined with PLUG’s existing expertise in providing green hydrogen solutions, the company is poised to expand beyond the U.S. and become global in the near term. In fact, PLUG’s recent partnerships forged with SK Group and Renault already paves way for its entry into the international market.
Earlier this year, PLUG and Renault, a Europe-based automaker, announced a 50/50 joint venture (“JV”) for the research and development, manufacturing and sale of fuel cell-powered electric vehicles. The JV will be based in France and is expected to begin operations before the end of 2021. The strategic partnership will serve as PLUG’s gateway to the fast-growing global market for fuel cell-powered electric vehicles as discussed in earlier sections while leveraging Renault’s existing expertise and competitive strengths in the global automotive industry. The JV will not only be building fuel cell-powered vehicles, but also the infrastructure needed to support the long-term usability of such vehicles in France and across Europe. And this strategic partnership will also be complemented by PLUG’s upcoming build-out of its electrolyzer business outside of Dusseldorf in Germany, as well as its hydrogen generation JV with ACCIONA; the green hydrogen generated from the two plants in Europe are expected to support the needs of future fuel cell-powered vehicles produced by the PLUG-Renault JV, as well as the company’s other activities in material handling across Europe.
PLUG’s entry into the Asian markets is also underpinned by a $1.6 billion capital investment by SK Group, a leading South Korean business group, in February. The investment is expected to introduce PLUG’s expertise in hydrogen solutions to Asian markets and make it a commercially viable alternative energy source in the region. The partnership with SK Group is deemed a “timely opportunity” for PLUG, as the South Korean government had just recently announced their Hydrogen Economy Roadmap through 2040, which entails generation of more than 5 million tons of hydrogen per year, 6 million fuel cell electric vehicles, 1,200 hydrogen fuel stations, and 15 gigawatts of fuel cell power generation – all of which are activities that PLUG has already shown proven expertise and capability in. The cumulative value of South Korea’s hydrogen economy from the set targets is projected at $40 billion by 2040, which will be an invaluable opportunity for PLUG to capitalize on through its partnership with SK Group.
Financial Outlook and Profitability
The ongoing push for global decarbonization makes a strong tailwind for the hydrogen sector. And based on the foregoing analysis, it is evident that PLUG is well-positioned to capitalize on the growing opportunities within the industry. The company’s commitment to extending application of its hydrogen fuel cell technology outside of the industrial environment, and contributions to building out both the U.S. and global hydrogen economies are expected to accelerate its journey towards the long-awaited profits within the next five years.
Based on the latest earnings press conference, management is targeting gross billings of $475 million by the end of the year, $750 million in FY 2022, and $1.7 billion in FY 2024. As of June 22nd, PLUG has already achieved 40% of its target billings for the year, compared to the historical rate of about 33% achieved at the same point in time in prior years, which is indicative of the industry’s strong momentum driven by current energy transition mandates. Considering PLUG’s achievements to date, as well as their ongoing contributions to the global hydrogen economy and current market trends, we believe management’s guidance for gross billings into 2024 are reasonable and have applied them in our base case forecast. On this basis, we are forecasting net revenues of $463.8 million by the end of FY 2021, which is consistent with the historical rate of approximately 97% of gross billings recognized as revenues within the same year. A similar revenue recognition rate of has been applied to management’s gross billing targets for FY 2022 to FY 2024, resulting in forecasted net revenues of $730.3 million, $1.10 billion, and $1.66 billion in FY 2022, FY 2023, and FY 2024, respectively. Our base case forecast projects PLUG’s net revenues to grow at a CAGR of 52% into 2026 to $3.8 billion, and at a CAGR of 35% over a 10-year discrete period to $9.07 billion by 2031. The growth assumptions applied consider the current market trends for global hydrogen generation, automotive fuel cell demands, as well as aerospace fuel cell demands, combined with PLUG’s current business model and management’s guidance as analyzed in earlier sections.
In our bull case forecast, we are expecting PLUG’s net sales for FY 2021 to remain consistent with our base case projections based on the company’s current performance. And in the 10-year discrete period into FY 2031, we are projecting net sales to grow at a CAGR of 42% to $15.1 billion. The added premium compared to our base case revenue growth assumptions takes PLUG’s projected revenue growth closer to those forecasted for the global market, which is north of 50% based on our foregoing analysis; the growth assumption also takes into consideration the company’s potential in accelerating its global expansion plans through additional strategic partnerships and capital investments, given management’s capex projections of $750 million in each of the next two years compared to barely half a million allocated to capital investments in the past five years.
In terms of cost of revenues, our base case forecast projects costs related to the unprofitable arms of PLUG’s business - namely, the “services performed on fuel cell systems and related infrastructure”, “power purchase agreements” and “fuel deliveries to customers” segments - to decrease by approximately 28% year-over-year into FY 2024. This is consistent with expectations that PLUG’s business will continue to scale with pent-up demand for hydrogen solutions and fuel cells in the near term, which will accordingly decrease its material and labour costs associated with producing and servicing fuel cell systems and their related infrastructure. PLUG’s ongoing vertical integration strategy in the hydrogen business is also evident through its recent acquisitions of United Hydrogen Group and Giner ELX in 2020, which will help to further reduce the company’s hydrogen generation costs in the long-run, and help margin expansion in its “power purchase agreements” and “fuel deliveries to customers” segments. Our projected decrease in costs of revenues is also in line with the market’s outlook on hydrogen costs, which is expected to decrease by up to 50% by 2030 as a result of scaled productions, distribution and application, making it a competitively priced alternative energy source. With these long-term cost reduction trends in mind, we are projecting $518.3 million in total cost of revenues for FY 2021, $678.8 million for FY 2022, $880.2 million for FY 2023, and $1.16 billion for FY 2024. This accordingly results in gross profit margin expansion from -12% estimated for FY 2021, to 30% by FY 2024, which is in line with market expectations of decreasing hydrogen costs, as well as the company’s cost-reduction strategies through scale and vertical integration.
Our forecasts are projecting higher operating expenses from FY 2021 to FY 2025 as PLUG continues to devote resources towards researching and developing new hydrogen products and technologies to enhance its existing offerings, which are still in early stages of adoption, and improve cost efficiencies to drive further commercialization. Specifically, research and development expenses are projected at 11% to 12% of total net sales from FY 2021 to FY 2025 to support ongoing efforts in extending the application of its existing hydrogen fuel cell technology onto on-road vehicles and short-haul aircraft; related expenses are expected to taper from FY 2026 onwards to approximately 7% of total revenues, which is in line with PLUG’s historical spending. Meanwhile, selling, general and administrative costs are expected to stay at approximately 19% of total net sales from FY 2021 to FY 2025 to support ongoing global expansion efforts, which is consistent with those observed across industry peers, as well as PLUG’s related spending in the past two years. And the said expenses are expected to taper from FY 2026 onwards to approximately 9% of total net sales to reflect the anticipated stable state of PLUG’s expansion efforts. As a result, we are projecting total operating expenses of $183.3 million by the end of the year, with continued growth at a CAGR of 32% to $741.1 million by FY 2026, and at a CAGR of 23% to $1.4 billion by FY 2031.
Taking the above projections into consideration, our base case forecast estimates net losses of $273 million for FY 2021, reflecting year-over-year improvements of more than 50%. And these losses are expected to persist but at a gradually decreasing rate into FY 2025 as PLUG continues to deploy significant resources towards advancing its hydrogen fuel cell technology for diversified application and expanding its hydrogen generation capacities. The company is projected to start realizing profits of approximately $301.1 million by FY 2026. And considering the fast-growing global demand for hydrogen energy sources and the anticipated decrease in hydrogen costs, we are forecasting PLUG’s bottom line to grow at a CAGR of 31% from FY 2026 to $1.18 billion by FY 2031.
PLUG Stock Valuation
Based on our foregoing analysis and above financial projections for PLUG, our base case price target is $47.18, which represents an estimated equity value of $26.8 billion. This represents upside potential of more than 45% based on the last traded share price of $32.48 on July 2nd.
We have derived our valuation projections from a discounted cash flow (“DCF”) analysis over a 10-year discrete period considering PLUG’s business is currently in growth phase with hydrogen energy solutions still in early stages of adoption, and will not reach a stable state until the end of the decade. The analysis is performed in conjunction with the forecasted financial information analyzed in earlier sections, and assumes a 64.9x EV/EBITDA multiple, which is in line with industry peers engaged in the business of alternative energy sources and consistent with PLUG’s critical role in growing the global hydrogen economy. We have applied a WACC of 14% to discount PLUG’s projected free cash flows and arrive at our price target of $47.18; the WACC applied is reflective of the company’s current risk profile, considering management’s intention to increase leverage on their balance sheet starting in the second half of the year to support the ongoing build-out of its hydrogen fuel cell and hydrogen generation businesses.
Risks and Challenges
An imminent challenge for PLUG is that hydrogen fuel cell adoption is still in early stages of wide adoption. As such, it may still be a few years out before the company starts to realize returns on its capital and resources deployed into growing the global hydrogen economy, which is consistent with our financial projections. There is also a risk that PLUG’s research and development efforts in extending the application of its existing hydrogen fuel cell technology onto on-road vehicles and short-haul aircraft will not materialize in time, and become outpaced by battery cell technology, which is already widely used in electric vehicles with ongoing technological advancements to make it just as competitive in terms of range, charge times and production costs. The current infrastructure for supporting battery cell technology is also much more developed than those needed to support hydrogen fuel cell technology, making the former a much more commercially viable choice compared to the latter at the moment, which further adds pressure to the emerging hydrogen industry.
However, in the event that wide adoption of hydrogen fuel cell application onto on-road vehicles and aircraft do not take off, PLUG’s business will still be underpinned by long-term and high-value contracts for the provision of hydrogen solutions to the industrial and stationary sectors in which it currently services. And considering the growing demand for alternative energy sources to support the long-term decarbonization needs within the industrial sector, combined with the improving cost structure resulting from PLUG’s vertical integration strategy and the projected decrease in hydrogen costs, PLUG will still be able to realize profits and exhibit promising upside potential in the next five years, making them an attractive long-term investment.
Conclusion: Where Could Plug Power Be In 5 Years?
We believe the next five to ten years will be an opportune time for the hydrogen industry. This is especially true for PLUG, which we consider to have a first-mover advantage within the fast-growing sector based on the years of experience and technology they already possess, their established reputation in the industry as evidenced by their impressive roster of pedestal customers (e.g. Amazon, Walmart (NYSE: WMT), and The Home Depot (NYSE: HD)), and their recent strategic partnerships forged with global conglomerates. The contributions of PLUG will be critical in the up-and-coming decade of decarbonization, as global demand for green hydrogen continues to ramp up. We are confident that the next five years will be pivotal for PLUG as they embark onto a trajectory of global adoption and profit realization, which will be reflected in their price performance in the near term.
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