2 Things Plug Power Would Need to Do Before I'd Buy the Stock

Key Points

• Plug Power continues to destroy shareholder value rather than grow it.

• The company is losing a lot of money.

• The hydrogen company needs to change the way it operates before I would ever consider buying shares.

• 10 stocks we like better than Plug Power ›

I am not a fan of Plug Power (NASDAQ: PLUG). While I'm intrigued by the growth prospects of the hydrogen sector, I have specific concerns about its business operations. These issues are why I have never purchased the stock.

I do not currently plan to invest in Plug Power. However, there are certain actions the company could take that would make it a more compelling investment. The following changes could shift my stance on this hydrogen stock.

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Image source: Getty Images.

Stop diluting investors

One of my biggest concerns is that management routinely sells more stock to fund its operations and expansion, which can be detrimental to existing shareholders. The number of outstanding shares has risen an astounding 26,750% since its initial public offering (IPO) in 1999. That huge amount of dilution is why the stock has lost a staggering 99% of its value over the years.

Plug Power routinely sells stock at ever-lower prices. For example, earlier this year, the company sold 46.5 million shares and 138.9 million warrants to purchase future shares at an average price of $1.51 per share, raising $280 million in cash to continue operating.

That sale occurred less than a year after it sold 78.7 million shares at an average price of $2.54 per share, raising $200 million in funding. These share sales at steadily lower prices are destroying stockholder value.

The company currently doesn't anticipate any added dilutive equity offerings this year. That's largely due to its efforts to enhance its liquidity by acquiring a $525 million secured credit facility from Yorkville Advisors.

While Plug Power currently doesn't plan on issuing more stock this year, the possibility remains. The company has shown a preference for dilutive equity issuances over other options, such as slowing growth, cutting costs, selling assets, or seeking joint-venture partners. These alternatives could provide funding without further equity dilution. Continued equity issuances could further erode shareholder value.

Start making money

One of the reasons Plug Power needs to sell stock is that it has not yet achieved profitability, despite being a public company for over a quarter-century. The company isn't just cash flow negative or not profitable on the basis of generally accepted accounting principles (GAAP). It's losing money on every single sale.

During the second quarter, it reported a gross margin loss of 55%. It cost the company $207 million just to generate $133 million in revenue. While that's an improvement from the 132% gross margin loss it had in the year-ago period, it's no way to run a business.

Besides losing money on every sale, Plug Power is incurring further expenses to operate its business and expand those operations. As a result, it's burning through a significant amount of cash each quarter.

The company's cash burn rate was $151.1 million in the second quarter. That's an improvement from $288.3 million in the year-ago period, but it only had $295.8 million in unrestricted cash on its balance sheet at the end of the quarter, meaning it could only operate for two more quarters at that burn rate before it would run out of cash if it didn't raise more capital.

On a positive note, Plug Power realizes this is an issue. The company launched its Project Quantum Leap earlier this year in an effort to generate over $200 million in annual cost savings. That's part of an overall strategy to push toward sustainable profitability.

The company's goal is to end this year with positive gross-margin run rates. That would set the stage to start producing positive operating income by the end of 2027 and reach overall profitability by the end of 2028. I'd like to see positive progress toward this goal before I consider investing in the stock.

Plug Power has a lot of work to do

Plug Power is a leader in the hydrogen sector. Unfortunately, the company's current strategy has destroyed shareholder value rather than created it, mainly due to ongoing dilution and lack of profitability. I won't even consider investing in Plug until it stops further dilution of shareholders and demonstrates consistent progress toward sustainable profitability.

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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.