Plug Power’s (PLUG, Financial) stock has staged an impressive recovery ever since the company shared a bad quarterly report. If you look at Plug Power’s history, however, you’ll know that the stock has been pumped up many times based on false hopes, only to come crashing down after. Some vague comments by the company’s management and cherry-picking statistics from earnings reports usually push Plug Power’s stock higher; however, there has been no such driving force this time and the stock has jumped on just a few rumors.
Plug Power’s margins
Plug Power has a negative gross profit margin. This means that the company spends over $1 to generate $1 of revenue. Even if Plug Power is able to continue delivering record revenues, the company’s earnings are what matter the most. Due to a negative gross profit margin, growing revenue will result in growing losses.
In addition, Plug Power supplies its products to big-name clients like Walmart (WMT, Financial), and Home Depot (HD). The problem with having big-name clients is that it gives them pricing power over Plug Power. Since Plug Power needs the business, the company is forced to sell their products at an overall loss and as a result, I don’t see any hope for the company’s gross margin going forward. Having high profile clients will continue hurting the company’s gross margin in the long term.
While the stock has staged an impressive turnaround in the last few days, I expect it to trend lower in the long term. Given the history, investors can expect the stock to move higher on some vague promises. Hence, Plug Power is a stock that investors should avoid.
Conclusion
With the company’s history of losses, I think investors should use the rally to sell the stock. Growing revenues won’t matter as Plug Power has a negative gross profit margin and earnings may take a big hit in the coming months.
Despite the troubles, Plug Power is trading at a premium valuation. The company has never reported an annual profit in its years of existence and has a P/S ratio of 5.5. Given the negatives, the stock is clearly very expensive.
In addition, supplying to big-name clients will also put downward pressure on Plug Power’s gross margin going forward. Bearing all these things in mind, I think investors should stay away from the stock.
