Plug Power Positioned to Be One of the Biggest Beneficiaries of Climate Incentives

We raise our fair value estimate for Plug Power PLUG to $27 from $20 following its second-quarter results and after incorporating the proposed Inflation Reduction Act into our valuation. The drivers of our increased valuation are higher long-term revenue growth and benefits from hydrogen incentives in the bill.

We continue to be optimistic on Plug’s long-term potential in the nascent green hydrogen economy. Shares are trading roughly 10% below our fair value estimate but still within 3-star territory.

Plug’s second-quarter results continued to show choppiness in its near-term financials, with reported gross margin negative for the quarter largely related to elevated hydrogen procurement costs. However, we place little emphasis on near-term results given the early stage of the hydrogen market and focus more on the reaffirming of full-year revenue guidance and reiteration of its green hydrogen network targets (with likely upside assuming the inflation legislation passes).

Looking out over the next 12 months, we expect profitability to improve for Plug’s currently challenged business lines: service and hydrogen fuel. The company noted that service gross margins should reach breakeven by the end of this year due to increased product reliability and labor leverage. Hydrogen fuel margins, which have been driven sharply negative due to the elevated natural gas price environment, should see a step change as the company builds out its green hydrogen network and relies less on third parties. Management expects fuel costs to reach breakeven levels in the second half of 2023 as its green hydrogen plants become operational.