Over the past six months, Plug Power’s shares (currently trading at $2.43) have posted a disappointing 19.2% loss, well below the S&P 500’s 13.5% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Plug Power, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why PLUG doesn't excite us and a stock we'd rather own.
Why Do We Think Plug Power Will Underperform?
Powering forklifts for Walmart’s distribution centers, Plug Power (NASDAQ:PLUG) provides hydrogen fuel cells used to power electric motors.
1. Lackluster Revenue Growth
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Plug Power’s recent history shows its demand slowed significantly as its annualized revenue growth of 1.3% over the last two years is well below its five-year trend. 
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Plug Power’s margin dropped meaningfully over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because it’s already burning cash. Plug Power’s free cash flow margin for the trailing 12 months was negative 193%.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Plug Power burned through $1.27 billion of cash over the last year, and its $491.2 million of debt exceeds the $93.94 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Plug Power’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Plug Power until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Plug Power falls short of our quality standards. After the recent drawdown, the stock trades at $2.43 per share (or 1.8× forward price-to-sales). The market typically values companies like Plug Power based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d recommend looking at Microsoft, the most dominant software business in the world.
Stocks We Would Buy Instead of Plug Power
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