The funding case for inexperienced hydrogen and Plug Energy (NASDAQ:PLUG) is changing into more and more convincing. 2022 will probably be a pivotal 12 months for Plug because it continues to execute properly on its mid and long run objectives. There is growing proof from the Ukraine Russia disaster that hydrogen is more and more a viable and important vitality possibility ought to the world want to transfer away from reliance on fossil fuels and on Russia for vitality. Moreover, Plug Energy simply launched 4Q21 outcomes that beat expectations and confirmed that its execution and technique stays on monitor to assembly its long run objectives. Lastly, there are various beneficial insurance policies rising for Plug Energy, not simply within the US, but additionally globally.
I’ve written an preliminary article on Plug Energy that may be discovered right here, and a subsequent observe up article that may be discovered right here.
Funding thesis
It’s changing into more and more clear that Plug Energy has the potential to be the inexperienced hydrogen chief of the long run. I proceed to face by my funding thesis and discover that with its present execution in addition to with growing consciousness, help and utilisation of hydrogen as a clear vitality gasoline, I present additional conviction in my funding thesis as proven under:
I consider that Plug Energy is on monitor to changing into the worldwide chief and the following Tesla (TSLA) within the hydrogen area. This is because of (1) Plug Energy’s expertise management in hydrogen gasoline cell techniques. (2) Plug Energy is vertically built-in in upstream and downstream segments of the hydrogen financial system. (3) In consequence, Plug Energy is not only gaining curiosity, but additionally contracts from giant, established clients. (4) More and more beneficial business and regulatory dynamics is optimistic for the inexperienced hydrogen business.
Overview
For the newer readers who’re unfamiliar with Plug Energy, the corporate is a pacesetter in supplying hydrogen gasoline cell expertise merchandise in addition to options and targets to function globally because it continues to increase into new markets and geographies.
Plug Energy is anticipated to see one of many strongest development and profitability within the hydrogen area and focuses strongly on inexperienced hydrogen. Plug Energy is scaling up its PEM-based expertise manufacturing very quickly and has a method to construct up a hydrogen manufacturing community, in addition to fuelling techniques.
Plug Energy has important first mover benefit in a number of segments and has a vertically built-in technique throughout the hydrogen area, additional solidifying its market place. Plug Energy is targeted on an enormous addressable market and thus will develop shortly in step with this nascent business. Lastly, it’s razor centered on reaching 50% income CAGR development to realize $3 billion in revenues by 2025 and EBITDA of $600 million by 2025. In my view, it has the mandatory partnerships with giant world corporations like SK Group, Renault and different corporations make this very achievable.
A stellar 4Q21 outcomes
Plug Energy’s 4Q21 revenues got here in above my expectations and it continued to reiterate income steerage in addition to gross margin enchancment throughout 2022 and over the following few years. For 4Q21, Plug Energy recorded revenues of $162 million that beat expectations. Nonetheless, as per expectations Plug Energy recorded a web lack of $0.33 per share. This was as a consequence of margins and earnings per share being impacted by the upper gasoline and repair prices as soon as once more, as a consequence of influence from the availability chain points attributable to covid-19. Moreover, this was additional impacted by larger pure fuel costs as properly. That mentioned, administration expects important enhancements in margins and profitability, particularly so in 2023 and 2024, when there’s extra hydrogen capability that comes on-line, and so they additionally anticipate that service prices will proceed to say no with growing scale.
Trying deeper into expectations on price facet, administration expects long run price reductions in price to quantity to 30% in 2022 and 45% by finish of 2023 within the service section, on a per unit foundation. Moreover, they anticipate there to be price reductions within the gasoline section to quantity to 50% by finish of 2025 within the gasoline section, which for my part, will probably be key drivers of margin growth.
Trying in direction of the long run objectives, Plug Energy continued to reiterate its income outlook for 2022 with $925 million to $950 million revenues. 25% of those are prone to come from abroad markets. Moreover, it expects 2025 revenues of $3 billion revenues, 20% EBITDA margin, and 17% working margin.
With Plug Energy’s latest 4Q21 outcomes, I consider that the corporate is on monitor to no less than assembly the baseline steerage for its said long run 2025 targets in all of its enterprise segments, like inexperienced hydrogen, electrolyzers, materials dealing with, and rising mobility and backup energy functions. That is particularly so with beneficial coverage help rising not simply within the US but additionally globally.
Electrolyzers
I’m of the opinion that Plug Energy is rather well positioned within the hydrogen area for upcoming hydrogen initiatives, particularly so in service provider electrolyzer gross sales. When it comes to its present progress, Plug Energy reaffirmed its steerage to ship 155MW of electrolyzer capability in 2022. As well as, there’s a big backlog of no less than 1GW secured by 12 months finish. I feel this bodes properly when it comes to the proof of giant demand for Plug Energy’s electrolyzers, as its clients more and more see the advantages and worth add that comes with buying electrolyzers from Plug Energy.
Moreover, there’s potential upside to the present expectations for electrolyzers as administration continues to be upbeat and optimistic in regards to the important win fee of about 50% globally, in addition to its gross sales funnel within the electrolyzer enterprise. Additional solidifying its place is the truth that Plug Energy continues to make enhancements to its electrolyzer merchandise.
As well as, administration has plans to be selective with the purchasers it chooses, prioritising those which have the capabilities to construct a plant with clear off-take agreements in addition to robust monetary backing. I’m of the opinion that Plug Energy is in an excellent place within the business that permits it to have this kind of leverage, which is additional contributed by the large demand in electrolyzers within the coming years. It makes rather more enterprise sense at this very early stage for the electrolyzer enterprise to give attention to clients that may assist it develop, and that may develop with Plug Energy, and that these clients may be long run clients of the corporate.
Supplies dealing with
As its major core enterprise for a while now, Plug Energy’s place within the supplies dealing with area is well-known. Regardless of the availability constraints that the world is going through, Plug Energy continues to see its core enterprise section develop steadily.
Plug Energy reaffirmed its steerage to recognise about $600 million in revenues for the materials dealing with enterprise in 2022. It additionally reaffirmed its objective to achieve gross margin neutrality within the service section from price downs, enhance refuelling station capability, and add 3 new pedestal clients. Of those 3 new pedestal clients, 2 are to be from Europe, additional increasing the corporate‘s world footprint.
For the supplies dealing with enterprise, I feel that the corporate is definitely not given sufficient credit score for its means to navigate the availability constraints on this a part of the enterprise, provided that we simply noticed file ranges of shipments in 4Q21 for the fabric dealing with enterprise. As well as, I’m of the opinion that it bodes rather well for the corporate to have the ability to safe pedestal clients in Europe and relying on who these clients are, it may possibly present that Plug Energy can succeed not simply in its own residence turf, but additionally on a world scale in different worldwide markets as properly. This is able to imply that Plug Energy’s materials dealing with choices are globally aggressive and will proceed additional world growth.
Mobility and backup energy
This section is comparatively new and an up and coming section for Plug Energy, much like how its electrolyzer enterprise was up to now few years. On this enterprise section, Plug Energy is creating expertise for rising alternatives with rising market sizes.
The corporate reaffirmed its targets to have 250,000 autos on the highway and 30% market share by 2030, by way of the Renault HYVIA three way partnership. Moreover, administration expects to ship 250 autos in 2022 to about 20 totally different clients and expects a fair bigger ramp up coming in 2023. With reference to stationary energy, Plug Energy reaffirmed administration’s expectations to ship 1MW in initiatives within the second half of 2022.
Inexperienced hydrogen
Lastly, with the inexperienced hydrogen section, Plug Energy continues to ramp up manufacturing capability and convey gasoline prices down. That is the a part of the enterprise the place the economics seems to be more and more enticing with fossil gasoline costs rising (Extra on this under).
Administration expects Plug Energy to proceed to stay on monitor with its inexperienced hydrogen manufacturing targets and that with nice execution, we may see gross margins transfer from the present unfavourable margins right now to about 30% by 2024.
Presently, Plug Energy’s inside hydrogen demand is about 40 to 50 TPD, and the surplus of that produced will probably be a chance to promote hydrogen gasoline to new markets or segments.
For my part, the economics for inexperienced hydrogen turns into considerably extra enticing if pure fuel costs stay structurally elevated, and that pure fuel costs will possible stay structurally elevated, so this may very well be a further demand driver for the inexperienced hydrogen enterprise sooner or later. Moreover, I proceed to have the view that there will probably be effectivity enhancements from the liquefaction partnerships that may assist to enhance margins and scale back total prices.
Rising fossil gasoline prices from Russia Ukraine conflict
Inexperienced hydrogen has change into an sudden beneficiary to the invasion of Ukraine by Russia because of the rising vitality prices from fossil fuels. It was discovered by BNEF that inexperienced hydrogen is now cheaper than gray hydrogen in Europe, Center East, and China. With the transfer to cut back reliance on fossil fuels and away from Russia specifically, this makes inexperienced hydrogen a really viable possibility on this new local weather. In response to BNEF, the price of producing inexperienced hydrogen in EMEA is now $4.84 to $6.68 per kg, in comparison with the price of gray hydrogen of $6.71 per kg. Likewise, we see that the price of inexperienced hydrogen is $3.22 per kg in China in comparison with $5.28 per kg for gray hydrogen.
I feel that with Europe trying eagerly to cut back reliance on Russia imports of fuel and with Russian fuel imports accounting for 45% of EU’s fuel imports, I’m of the view that we are going to possible see considerably fuel costs within the foreseeable future. As such, there are various corporations and governments that will more and more see inexperienced hydrogen as the brand new manner ahead to make vitality safety a actuality.
As such, I’m of the view that the shift in direction of inexperienced hydrogen may unexpectedly be accelerated because of the new realities globally. That is after all additionally echoed by Andy Marsh, CEO of Plug Energy, who additionally sees this changing into a actuality and positioning Plug Energy to speed up their deployment of inexperienced hydrogen applied sciences and manufacturing
Valuation
As elaborated earlier in my evaluation of Plug Energy’s 4Q21 outcomes, I feel one factor that has been a standard theme is the very stable execution of the corporate throughout a number of excessive development segments, and the administration staff definitely has a really huge position to play on this excessive degree of execution not seen in different corporations. It is a huge deal for corporations like Plug Energy the place there’s nonetheless a protracted runway and with big expectations to satisfy long run steerage set by administration. As such, I proceed to consider that Plug Energy ought to command a premium valuation to friends within the business.
As such, with the considerably enhancing enterprise fundamentals and development profile and enhancing business and governmental coverage help for Plug Energy’s companies, I proceed to see robust conviction in PLUG and thus, I reiterate my goal worth of $40.06 from my earlier article, which may be discovered right here, implying an upside of 41% from present ranges.
Plug Energy is presently buying and selling at 14.3x FY2022 EV/gross sales and 9.3x FY2023 EV/gross sales. Though Plug Energy presently trades on a a number of of ahead gross sales, I anticipate that Plug Energy will shortly pivot in direction of important profitability in 2023 to 2024, and as such with the robust earnings development potential relative to the opposite gamers within the hydrogen area, I feel that its present ahead gross sales a number of isn’t unreasonable on this context.
Conclusion
The longer term seems to be actually brilliant for Plug Energy, particularly with favorable coverage help rising within the each the US and globally. I proceed to have consider within the firm’s execution capabilities in 2022 as it would even be a important 12 months in Plug Energy’s inexperienced hydrogen roadmap, and its path in direction of its 2025 objectives. I feel we are going to proceed to see growing backlog in its electrolyzer enterprise, growth of its buyer base in materials dealing with, and additional developments in expertise for its rising companies. I proceed to have conviction that Plug Energy may be very properly positioned presently to ship on its present and future enterprise alternatives, in addition to drive a really important earnings and margins growth because it has the flexibility to in a short time transfer in direction of profitability over the following few years with all of the levers it has to drag. I proceed to consider that Plug Energy will probably be a pacesetter of the hydrogen market sooner or later and reiterate my goal worth of $40.06 for Plug Energy, implying an upside potential of 41%.