Since its March 2020 low, Plug Power has risen around 1000%. That amount of movement is profound and places new investors on the outside wondering, where is it going from here?

This will typically leave the optimists with rose-colored glasses chomping at the bit to enter the fray. They’ve likely been reading about hydrogen fuel cell technology and are really excited about the prospects. However, these types of trends typically end very ugly for latecomers as the greater fool theory plays out in real-time.

As you begin to evaluate PLUG at its price point, there are three major considerations to make:

1. Profitability
2. Growth
3. Sustainability of price trend

As you consider these three areas, you should have a good perspective on the potential risk/reward.

PLUG Profitability

In the trailing twelve months (TTM) PLUG brought in $307.54 million in revenue and lost $103.82 million in net income. The first takeaway is the fact the company is not generating a profit. While it’s an important consideration, many companies that aren’t turning a profit are generating positive operating cash flow and may have significant revenue growth expectations.

The current operating cash flow for PLUG is a loss of $156.6 million. That is substantial and the trend has worsened in the last year after improving slightly from 2017 to 2019. This is a major cause of concern for the viability of a company. The lack of operating cash flow is an indication of an unproven business model.

Plug Growth

It’s possible that the cash flow and profitability situation can improve with an increase in revenue. Current 2020 analyst expectations are for a 36.9% increase in revenue and a 35.8% increase in revenue in 2021. Looking at this should provide some degree of optimism. However, as you look at its three-year revenue growth of 28.4%, you realize that the company has yet to realize any economies of scale.

This reality is reflected in the projected $0.31 per share loss for 2020 and $0.25 loss for 2021. This acknowledgment should lead you to want to look at the company’s margins.

Since the company isn’t generating any positive operating cash flow, you’ll need to start a little higher in the income statement. That means looking at the company’s gross margin. In order to calculate this, you will have to use the following formula:

In the above formula, COGS stand for Cost of Goods Sold.

For PLUG, the company had gross margins of 3.93% in the TTM. Apart from 2019, the company’s gross margin has been less than 5%. As you put this low number into perspective, understand that a typical growth stock has margins of 35% to 40% or more. Clearly this company struggles from being able to produce a product with even a modest amount of positive margin.

PLUG Sustainability of Price Trend

Plug Power has a float of 397.2 million, and a 20-day average volume of 36.0 million shares. That means that the company is turning over its float every 10 days or so. That’s not a long period of time but certainly not the turnover rate that some of the EV stocks that PLUG is usually compared to.

As you look at the angle of the trend, the trajectory of the price movement is much closer to a 45-degree angle. That makes the trend of PLUG more sustainable than many of the other companies in this space.

As you look at its trend, the price has been trading in a channel since July and is consolidating at the upper end of its channel.

Conclusion

While there isn’t any immediate indication of a major correction in PLUG, the profitability of the company is definitely in question. The ultra-low gross margins mean that a significant increase in revenues won’t be able to generate much of an increase in net income. That has to be a major warning sign for this company. It means that the company still must prove it's a going concern, and that is a hard reality for a company that has risen 1000% in less than a year.