The world is pivoting to increasingly clean sources of energy, and highly visible companies like Amazon (AMZN) and FedEx (FDX) are increasingly turning to hydrogen fuel cells, explains Adam Johnson, growth stock specialist and editor of Bullseye Brief.
These portable, battery-like power plants use hydrogen and oxygen to create electricity, producing only water and heat in the process. While still twice as expensive as internal combustion engines, large-scale fuel cell deployments are proving cheaper than electric vehicle (EV) and internal combustion engine (ICE) fleets when considering total lifetime operating costs, according to McKinsey & Company.
Additionally, hydrogen fuel cells have twice the range of lithium ion batteries, they recharge 15 times faster and weigh one-tenth as much. The leading hydrogen fuel cell company sold $500M of equipment and fuel last year, and has targeted $1B in sales this year. Its stock is down significantly amid market volatility, and I’m a buyer.
Plug Power Inc. (PLUG) aspires to lead the conversion of industrial/construction vehicles from diesel to hydrogen over the next decade. The company produces more liquified hydrogen fuel than all competitors combined, and has articulated a 10-year plan to add capacity backed by long-term supply agreements with major fleet operators.
Plug Power also builds the hydrogen consuming fuel cells which produce 100% green electricity and operates the world’s largest hydrogen distribution network. Revenues could double this year, potentially enabling positive cashflow by Q3 and setting the stage for after-tax profitability by 2023. JPM estimates Plug’s market opportunity at $200B, which creates a significant runway for growth, especially given the company’s scale and first-mover advantage.
The emerging Hydrogen Ecosystem includes three essential components, and Plug Power leads globally in all of them: Creating a usable hydrogen fuel; Distributing this fuel source; Harnessing hydrogen to produce power.
FCEL deployment is already well underway. Fully-capable fuel cell passenger vehicles are currently for sale from Honda, Hyundai and Toyota, while experimental FCEL models are in development at Audi, BMW and VW. To accommodate this burgeoning fleet of hydrogen-powered vehicles, 2,800 specialized fueling stations have already been built around the world. Additional signs of FCEL progress abound as governments address pollution.
Management targets several end-user markets for its fuel cells, over 100,000 of which are already deployed and operating. The first and most easily serviced is the forklift market, where Plug has 9% market share of the 4M vehicles at use in the US and Europe.
The company has also sold over 50,000 fuel cells which are powering buses, delivery vans and long-haul trucks. Collectively these commercial deployments have logged 600 million hours of service over 2 billion miles. Stationary generating platforms are the company’s next target market. This could include data centers and small factories, as well as diesel generators. Plug believes this is a $25B market opportunity.
There are a lot of moving parts and assumptions behind these goals, not to mention executing in what will likely prove a challenging operating environment, but they provide a base case from which we can approximate valuation.
For this task, I think Tesla (TSLA) provides the closest comparison — since its effectively a power company that sells cars. Both refer to their battery facilities as gigafactories, and both characterize their businesses in terms of how many gigawatts of power their systems can produce over time.
Applying Tesla’s current multiples of 11 times Sales and 45 times EBITDA to Plug’s anticipated goals of $3B and $600M respectively, I calculate implied valuations of $58 and $49 respectively. Averaging them together yields my price target of $49, which is slightly above the $44 average among the 27 analysts who cover Plug (their targets range from $25 to $78).
I like owning PLUG under $25. The stock has traded to $19 and bounced on three occasions over the past 12 months. So I think buying a one-third position initially at $25, and saving ammo to scale down on the balance, makes sense.
My target of $49 derives from applying Tesla’s current valuation multiples to Plug’s projected revenue and EBITDA for 2025. I think Tesla is the best relative comp, since both are effectively battery companies positioned to lead the pivot to clean energy and each has first mover advantage in its respective niche.