Description
Asymptote zero- We have a short position in shares of Plug Power (PLUG). Plug is a supplier of hydrogen based fuel systems for use primarily in warehouses (forklifts). We see Plug as a terminal short though high share borrow costs have generally made this prohibitive - however current borrow costs at around 13% make this timely/interesting/actionable. Plug has a long history of 1) losing money (has lost $ every year since coming public in 1999) - not only at the net income/operating income level but also at the gross margin level for most of its history. The overall magnitude of these losses is staggering - Plug had an accumulated shareholder deficit of $1.1 billion as of 9/30/17 (2) continually touting customer relationships with the likes of Wal-Mart, Daimler, FedEx as proof of its strength/market leadership/legitimacy despite having had these relationships for many years (in some cases a decade+) without being able to generate profitability from them (and having negative gross margins for a good part of the time) - most recently, Plug added Amazon as a customer - in order to secure this business, Plug issued Amazon warrants for 19% of the company (3) guidance which pathologically overpromises/under-delivers and (4) growing its share count exponentially - Plug’s current share count is 231 million vs. 38 million in 2012. A skeptic might say that points 2&3 are used to facilitate 4 (Plug seems to have an enthusiastic/optimistic/delusional base of retail investors which act as a wealthy uncle) - PLUG has continually issued shares and warrants to stay afloat.
We see Plug as a timely short opportunity as:
- Cost of borrow, which has always been high (seen in range of 40-100% over past few years), has come down below 12%.
- Share price has shot up 103% YTD on the back of (a) strong (but again unprofitable revenue growth) YTD in 2017 - largely due to the aforementioned deal to supply Amazon (and a renewal deal w/ WMT that also involved a massive warrant issuance) earlier this year (b) along with more bullish talk from a CEO who has continually over-promised/under-delivered during his 9.5 years at the helm (c) a continued appetite for alternative energy anything and (d) retail investors emboldened by a bull market.
- This has caused the stock to trade up to a whopping 6x TTM GAAP revenue.
- I expect Plug to come to the equity market soon. Despite starting 2017 with $46 million in cash and raising $20.1 million via ATM equity issuances and another $17.6 million from warrant exercises, the ‘company’ burnt $109 million (through 9 months) in operating and investing activities. As such, at 9/30 Plug had just $8 million in unrestricted cash on the balance sheet. In July, Plug raised $13.6 million (and amended a credit facility for an addn’l $20 mn in working capital loans). Given the stock’s strong performance and heavy burn rate/dwindling cash balance, I would be very surprised if the company doesn’t sell a significant amount of stock in the next 2-3 months.
Historical results
| PLUG |
|
|
|
|
|
|
|
|
|
| ($ '000) |
|
|
|
|
|
|
|
|
|
| |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
| Revenue |
8,378 |
5,742 |
11,818 |
12,502 |
16,141 |
13,486 |
7,836 |
16,271 |
17,901 |
| YoY growth |
|
-31% |
106% |
6% |
29% |
-16% |
-42% |
108% |
10% |
| Gross Profit |
(4,677) |
(5,549) |
477 |
(1,658) |
(2,701) |
(2,687) |
(4,632) |
(12,171) |
(15,045) |
| GPM |
-56% |
-97% |
4% |
-13% |
-17% |
-20% |
-59% |
-75% |
-84% |
| OP |
(91,733) |
(73,641) |
(46,768) |
(51,911) |
(46,327) |
(47,978) |
(58,477) |
(70,712) |
(78,367) |
| OPM |
-1095% |
-1282% |
-396% |
-415% |
-287% |
-356% |
-746% |
-435% |
-438% |
| |
|
|
|
|
|
|
|
|
|
| Shares o/s (mn) |
|
|
|
|
|
|
8.7 |
8.8 |
12.8 |
| |
|
|
|
|
|
|
|
|
|
| |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
9 mo 17 |
| Revenue |
12,292 |
19,472 |
27,626 |
26,108 |
26,601 |
64,230 |
103,288 |
85,928 |
71,389 |
| YoY growth |
-31% |
58% |
42% |
-5% |
2% |
141% |
61% |
-17% |
33.8% |
| Gross Profit |
(7,387) |
(10,010) |
(9,276) |
(14,354) |
(11,248) |
(4,862) |
(9,890) |
3,946 |
(27,432) |
| GPM |
-60.1% |
-51.4% |
-33.6% |
-55.0% |
-42.3% |
-7.6% |
-9.6% |
4.6% |
-38.4% |
| OP |
(39,138) |
(45,265) |
(28,805) |
(34,365) |
(28,965) |
(37,932) |
(59,002) |
(51,519) |
(84,075) |
| OPM |
-318% |
-232% |
-104% |
-132% |
-109% |
-59% |
-57% |
-60% |
-118% |
| |
|
|
|
|
|
|
|
|
|
| Shares o/s (mn) |
13.1 |
13.2 |
37.8 |
38.4 |
106.4 |
173.6 |
180.6 |
191.7 |
231 |
| |
|
|
|
|
|
|
|
|
|
The rapid revenue growth Plug has exhibited year to date is largely a function of 1) new deal to supply Amazon and (2) sales to Wal-Mart (has been a customer for a decade or so). To secure these deals, Plug issued a significant # of warrants to both Amazon (warrants on 55 million shares - or ~19% of share count @ the time) & Wal-Mart (warrants on 55 mn shares). I don’t view this as any indication of strategic interest on the part of either company - rather, I see it as an opportunistic measure taken by Plug to boost its stock price and facilitate yet another capital raising. The company is a press release machine and I suspect that management was keenly aware that being able to mention Amazon as a customer (and investor?) would allow the company to raise more capital facilitating continuing generous compensation packages - CEO Marsh has taken home an average of $3.3 mn annually in total compensation over the past 3 years.
GAAP accounting treats the warrant allocation as a revenue contra-account - thus continuing the trend of PLUG producing a negative gross margin. As you’ve no doubt guessed, Plug shows an adjusted gross margin, that adds back the warrant related expense and produces a positive gross margin. It is impossible to believe that the warrant packages were not required to secure the deals with Wal Mart & Amazon and therefore the cost/dilution of said warrants is inextricably linked to the revenue produced by these contracts. But when you’ve got a cult-like following of retail investors, why not put out the adjusted figure?
Valuation
We don’t think Plug stock is actually worth anything though we don’t see it going to zero as the company has a cult-like following of retail investors who are willing to purchase its shares and are partially responsible for the ballooning share count. On some level, I see this as a positive for opportunistic short sellers as I’ve shorted the stock on and off during the past 3-4 years given press-release related spikes.
There is no evidence of a valuable proprietary technology or competitive advantage which would allow the company to generate a return on invested capital. While the company has grown sales over the past 5 years, this is really just a function of throwing capital into the business without any regard for economics which is evidenced by persistent negative gross margins. The warrant transaction outlined above was simply one more instance of this. We don’t see any value in the revenue generated by the company as we view it as being somewhat analogus to the idea that any one of us could operate a fast growing e-commerce site if we were to sell items for 25-50% less than their cost. I’m doubtful that anyone would be willing to pay anything for these ‘sales’.
If we decide to play a quick game of ‘oh what the heck’ and assume that this company could generate $218 million in revenue (consensus - non-GAAP basis I believe) at a 10% operating margin (I made this up - company is virtually certain. These are ridiculous assumptions - the revenue # is non-GAAP (benefit from giving away warrants to get sales) with the benefit of two massive lumpy orders hitting the books and the company has almost no chance of breaking even in my view but we are just playing 'what if', PLUG would be trading at ~27x OP at $2.50/share. Also, this doesn't account for the dilution from the massive warrant grants earlier this year.
Risks - Despite everything I just said, there are risks to being short this stock:
- I’m no expert on hydrogen fuel cells - my enthusiasm for being short this stock is based on historical results and patterns exhibited by the company which seem designed to facilitate share issuances and perpetuate the compensation of management. Other companies in the ‘sector’ have similar (and surprisingly long) histories (FCEL, BDLP) of operating losses, cash burn, and share issuances.
- While I believe that the company survival is predicated upon the continued incineration of the capital of retail investors, the fact that they’ve been able to do this for many years means that the share price can become significantly divorced from reality. As such, this thing could trade significantly higher if retail investors bite hard on some piece of news. There are many similarities between what we see with Plug and Zion Oil & Gas (written up earlier this year by Casper719) - a pattern of excitable press releases, equity issuances, a lack of follow through, a rapidly growing share count and…an enriched management team. That said, there will likely be periods of enthusiasm coupled with short squeezes that make it less than fun to be short this.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Equity issuance
- Company continues to miss guidance
- Retail Investor fatigue