Hydrogen technology company Plug Power (NASDAQ:PLUG) has been one of the hottest stocks in the market over the past year. During that stretch, PLUG stock soared as much as 2,400%.
Readers of my financial newsletter, The Daily 10X Stock Report, were able to enjoy the ride, as we highlighted PLUG stock for them when it was around $4.
But back to PLUG stock, the last month has not looked like the last year. Over the past month, PLUG stock has lost 40% of its value, due to no fault of its own.
So what gives?
Higher interest rates.
Luckily, this higher rate headwind is both overstated and ephemeral. It will pass. When it does, the focus will return to Plug Power’s fundamentals.
That’s a good thing for PLUG stock, since the fundamentals here are very healthy. Long story short, PLUG stock is in the midst of a near term correction in a longer-term uptrend. Investors who have time on their side should consider buying the dip.
PLUG Stock: The Rising Rates Headwind
You’ve probably read all the headlines by now. Interest rates are on the rise.
They’re moving higher. Every day. By a lot. Mostly because the economy is improving and because inflation is creeping up.
On one side, that’s a good thing for real Americans. On the other side, it’s a bad thing for stocks.
Higher interest rates means higher discount rates, lower valuations, and lower stock prices. Richly valued growth stocks are hit hardest in this dynamic, since they have the biggest valuations and therefore are subject to the biggest corrections.
PLUG stock is a richly valued growth stock. As such, it’s been caught up in this frenzy of “sell growth stocks as rates move higher”.
But here’s the thing: this frenzy — as is true with most frenzies — will be short lived.
Forget Interest Rate Noise
The catalyst for the recent sell-off in PLUG stock – a sharp rise in interest rates – is both ephemeral and overstated.
Rates are pushing higher right now because of huge fiscal and monetary stimulus. That inflationary force will continue for the foreseeable future. But it’s simultaneously fighting against much-bigger, much-more-enduring deflationary forces in automation and globalization.
That is, automated technology is capable of replacing millions of jobs today. Think language processing software automating call-centers and customer service reps. Think self-check-out kiosks automating cashiers. Think telehealth platforms automating front-desk folks at hospitals.
Technology has advanced to the point of being ready to replace millions of jobs. At the same time, thanks to Covid-19, more and more enterprises are comfortable with adopting these technologies. The result is that, over the next few years, we are going to see huge and permanent job loss in some sectors of the economy.
That’s an enormous deflationary force.
Equally as powerful is globalization, as the global geopolitical stage is now set for globalization to come back into the spotlight and for companies to more aggressively outsource labor and production – which will keep consumer prices low.
So… yes… the government is spending a bunch of money… but they almost have to spend a ton of money just to keep rates from going negative.
Long-term, we are stuck in a lower-for-longer situation when it comes to interest rates.
That’s important, because while higher rates will hurt equity valuations, my numerical analysis of the relationship between interest rates and equity valuations dating back to the 1980s found that the 10-Year Treasury yield would have to rise to 2.5% before it started to have a meaningful impact on valuations.
News flash: That isn’t going to happen anytime soon.
So, buy the dip, especially in high-quality growth stocks that have a ton of long-term earnings potential, like PLUG stock.
Plug Power’s Strong Fundamentals
Plug Power is the technological heartbeat of the Hydrogen Economy — and this is a $10 trillion market in the making.
Here’s the story.
Plug Power has been in the game of making hydrogen fuel cells for decades now. Over that time, the company has proprietarily developed the industry’s highest-performing and lowest-cost hydrogen fuel cells.
Plug Power is first applying those industry-leading fuel cells to the materials handling end-market. In essence, Plug Power is selling fuel cells to warehouse operators for use in forklifts. That’s because HFCs have distinct energy density advantages over other alternative drive powertrains. This results in forklifts powered by Plug Power HFCs to be able to recharge in 90 to 120 seconds, with a 15% to 25% boost in productivity, which ultimately leads to huge cost-savings of about $900,000 per average distribution center.
Plug Power dominates this market. Walmart (NYSE:WMT), Home Depot (NYSE:HD), and Amazon (NASDAQ:AMZN) are all Plug Power customers. Long term, every forklift in the world will run on HFCs, and most of said forklifts will be powered by Plug Power tech.
Realizing that the potential of hydrogen extends beyond forklifts in warehouses, Plug Power is now in the early stages of applying its tech into much bigger end-markets, like green hydrogen generation, consumer autos, long-haul trucking, stationary, and more.
Rapid Expansion Ahead
The company has found great early success in these expansion efforts.
Plug Power has acquired Giner ELX and United Hydrogen to accelerate its green hydrogen production pursuits. The company expects to finish construction of two new hydrogen generation plants by the end of 2022, and believes it will be producing 500 tons of green hydrogen per day by 2025 and 800 tons per day before 2028.
On the automotive front, Plug Power has launched a JV with Renault Group to manufacture fuel cell-powered light commercial vehicles. That JV is targeting 30% share of the 500,000-unit fuel-cell LCV market in Europe by 2030.
On the stationary and auto front, Plug Power has partnered with SK Group, the second largest conglomerate in Korea, to develop a suite of turnkey hydrogen solutions, including hydrogen cars, refueling stations, back-up storage systems for data centers, and hydrogen production.
All in all, Plug Power is in the early stages of going from a niche supplier of HFCs forklifts, to a globally dominant supplier of turnkey hydrogen solutions to multiple end-markets, from forklifts to autos to aircraft to data centers.
Of course, that means the long-term outlook for PLUG stock is very attractive.
Big Upside Potential
Higher interest rates mean lower valuations for stocks. But even after factoring in higher interest rates, Plug Power stock is undervalued below $45.
Here’s the math.
Plug Power’s core materials handling market is a $30 billion market globally. As stated earlier, that entire market will go “green” over the next decade. Most of those green forklifts will be powered by HFCs, given hydrogen’s productivity and cost advantages. Most of those HFC forklifts will be powered by Plug Power tech, since Plug Power has superior technology and manufacturing capacity other other HFC makers.
Thus, it’s reasonable to say Plug Power control about 20% of the $30 billion materials handling market at scale. That implies $6 billion in revenues by 2030.
Meanwhile, it’s likely that Plug Power controls about 10% of the data-center market, another market where hydrogen solutions make sense given their productivity advantages. That’s a $37 billion market, implying another nearly $4 billion in revenue for Plug Power by 2030.
Therefore, even without autos, aircraft, or hydrogen production, Plug Power is on track to be a $10 billion revenue company by 2030.
Management is targeting EBITDA margins of 20% by 2024. Scale will drive further margin expansion into 2030. EBITDA margins around 30% are likely.
That implies $3 billion in EBITDA potential for Plug Power by 2030. My modeling suggests that will lead to about $5 in earnings per share for this company by 2030.
Based on a 20X forward earnings multiple, that implies a 2029 price target for PLUG stock of $100. Discounted back by 8.5% per year (up from 8%, to account for higher rates), that implies 2021 price target for PLUG stock of about $52.
Bottom Line on PLUG Stock
In a world with a 10-Year Treasury yield north of 1.5%, Plug Power stock should not trade above $75 today. But it should trade north of $50, and maybe even closer to $70 if the company makes further progress on its auto pursuits.
That’s why the recent dip in PLUG stock is a golden buying opportunity. This is one of the best growth stocks to buy for the long haul.
— Luke Lango
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Source: Investor Place