Plug Power Inc.

    • Plug Power (“PLUG” or “the Company”) is a manufacturer of hydrogen fuel cell systems with a ~20 year history of setting unrealistic goals and resorting to onerous financing, endless equity raises, and creative accounting to support unsustainable growth. It appears to be repeating this pattern of behavior today. The stock has advanced to a five-year high and $1.5B market cap (fully-diluted) on the back of rapid multiple expansion as analysts claim that PLUG has turned a corner by producing back-to-back quarters of positive EBITDA – a first for the Company. A closer analysis, however, reveals that this is largely attributable to a recent accounting change, amended lease agreements which conveniently take advantage of it, and dubious non-GAAP adjustments which defy reasonable accounting logic. Adjusting for these factors wipes out PLUG’s recent “inflection” to profitability and suggests that Company economics remain largely unchanged. PLUG has burdened itself with expensive debt and unfavorable customer agreements to support top-line growth and the appearance of profitability. A strained balance sheet and rapid cash burn could soon force Company to dilute investors even further, while, at the same time, it loses access to the leaseback arrangements supportive of the accelerated sales growth which has made dilution palatable of late.
    • A Long History of Unrealistic Targets and Broken Promises: Management is fond of saying that “we’ll be profitable this year.” It never is (until this year, or so it says). For ~20 years, management has stoked investor confidence by citing big TAMs, futuristic use-cases, and the latest investor buzzwords, creating a dedicated following of growth-oriented retail investors singing PLUG’s praises across internet chatboards. Underneath it all, PLUG has never turned a sustainable profit and has failed time and again to meet management’s promotional targets, both near and long-term. Institutional investors have almost entirely exited the stock as they see little reason to believe management’s promotional targets – nor that management will keep any promises not to dilute shareholders.
    • Dependent on Vendor Financing, Unfavorable Customer Agreements, and Expensive Debt for Growth: While large customer wins have supported sales growth at PLUG through the past five years, they came at a steep price. Much of this growth was facilitated by PLUG’s decision to provide expanded lease financing directly to customers in ~2014, likely at the behest of large, powerful customers such as Walmart and others. Sale/leaseback agreements with third parties, intended to support this lending, have tied up PLUG’s balance sheet in over $150M of restricted cash required by its financing partners to guarantee its leases with customers. PLUG’s attempts to finance customer arrangements through other means have resulted in excessive shareholder dilution – by a third of the total float in 2017 alone – despite management’s stated commitment to seek financing which would prevent it from having to distribute equity. Maintaining current sales and earnings growth rates will required similar dilution or leveraging up, which is becoming more and more unrealistic as the Company’s balance sheet becomes increasingly strained.
    • Recent Inflection to Profitability Attributable to Accounting Changes and Non-GAAP Adjustments: Since first embracing vendor financing as a route to growth, PLUG has crafted a panoply of non-GAAP metrics designed to recognize sales and profit associated with leased equipment up front. With its recent (accelerated) implementation of ASC 842 in late 2018, it was given a golden ticket to undertake the aggressive revenue and profit recognition that it had attempted to do several quarters prior, before receiving heavy pushback from SEC comment letters. PLUG immediately restructured its sale/leaseback agreements in late 2018 in a way that allowed it to maximize the benefit of this accounting change, and soon thereafter raised revenue guidance on claims of “ongoing development of its business pipeline.” Reversing this accounting windfall shows that sales growth and underlying profitability improved little, if at all, through late 2018-19. Further, in its recently-issued non-GAAP metrics, PLUG is also attempting to accelerate the top-line benefit of these agreements while removing the impact of inextricably-linked costs, skewing investors’ understanding of profitability.
    • Recent “Inflection to Profitability” Excites Investors, But Will Inevitably Be Short-Lived: PLUG shares trade at an all-time high $1.5B valuation and a peak EV/Sales multiple, on investor confidence that its recent “inflection” is a sign that the Company has finally turned the profitability corner. However, continued paper profitability will depend on continued growth through operating-type sale/leaseback agreements, for which the Company is rapidly running out of capacity given its $180M TTM cash burn and ballooning debt . Future growth facilitated by vendor financing, the source of most of its recent growth, must inevitably rely on alternative forms of financing which lack the advantageous accounting treatment of operating leasebacks, and which could entail further shareholder dilution.
    • Spruce Point’s Conclusion – PLUG Is Uninvestible: PLUG has never generated a meaningful profit in its ~20 year history, and almost all of its recent sales and earnings growth has been supported by either unsustainable financing or shareholder dilution. The Company does not have a clear path to profitability or steady growth without continuing to access these financing channels, some of which may become inaccessible to it in the near term. There is no reason to own PLUG shares unless, and until, the Company proves that it can grow and produce a profit on sustainable financing.
    • Non-credible management frequently announcing unrealistic targets that it consistently fails to achieve
    • “Smart” institutional investors’ avoidance of the stock suggests they have no trust in the Company
    • Capital structure deteriorating with escalating debt, and shareholders will inevitably bear the cost through more dilution
    • Recent “inflection” to profitability a product of accounting rather than underlying fundamental improvement
    • Absent access to capital, PLUG is worthless – and all assets have been pledged to creditor
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