As with other speculative stocks over the last few years, Plug Power (NASDAQ:PLUG) stock is rising well ahead of fundamentals.
That doesn’t mean it can’t continue.
Plug Power trades for $17.60 per share. That’s a market cap of $7.1 billion for a company that is expecting revenue of $260 million for 2020. Of course, let’s not even talk about income. Yet our Luke Lango is confidently predicting a move to $35 and TV analyst Jim Cramer agrees.
What’s going on?
Powering Plug stock is the company’s decision to control its supply chain. In June it bought two hydrogen companies, United Hydrogen Group and Giner ELX.
United Hydrogen operates a plant in Charleston, Tennessee, that can produce 6.4 tons of hydrogen per day, with a plan to increase that to 10 tons. Plug Power already held convertible bonds in United that could be more than 30% of its equity. It also had a supply agreement in place for its hydrogen-powered forklifts.
The United plant sits next to an Olin (NYSE:OLN) chlor-alkali plant that uses electrolysis to make things like chlorine and caustic soda from brine. Instead of Olin venting the resulting hydrogen, United captures it and sells it. Chinese plants have been using this hydrogen directly in fuel cells, with the water produced re-used in the plant.
Taken together, the United and Giner deals could result in a complete hydrogen supply chain without natural gas as a feedstock. This has been a big problem for the industry. Why buy hydrogen when you can just burn gas? The reason, in warehouses like those Plug Power supplies, is that natural gas burns while hydrogen is combined with oxygen to produce water.
Olin is the largest producer of chlor-alkali, with dozens of locations around the country. The Tennessee plant uses potassium chloride as a feedstock. It converted in 2011 from a process using mercury with technology from Ineos, a British chemical company best known for sponsoring a bicycle team.
Chemicals, however, are as cold as hydrogen is hot. Olin currently has a market cap of $2.4 billion, just one-third of Plug Power’s value.
Plug Power’s Pitch
Plug Power is now pitching itself as a hydrogen supplier, not just a maker of forklifts. It’s touting an updated McKinsey study saying a $140 billion market could be created in 10 years. Such studies have been produced for the Hydrogen Council for years but supply has always been the gating factor to growth.
The Bottom Line for Plug Stock
There is opportunity in hydrogen, but there are important steps that must be taken to consolidate it.
If all of Olin’s chlor-alkali plants can be used to produce hydrogen, and if Plug Power can reach an agreement with Olin, hydrogen supply won’t be a problem. Plug Power could, in theory, buy Olin for stock and control its destiny, but then it becomes a chemical company. Supply must also be scaled alongside demand and, right now, Plug Power can’t supply enough demand.
There’s a lot of hope here. If warehouses saw abundant hydrogen and companies like Plug Power could truly meet their needs, we might see a real boom. There remain uncertainties in this story. Hype may be getting ahead of itself.
For now, if you believe in Plug Power, consider buying Olin.
At the time of writing, Dana Blankenhorn has no positions in the stocks mentioned in this story.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.
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