Stock of the week: Plug Power

• Plug Power rallied over 100% so far this year

• Company announced 2 major partnerships

• SK Group will invest $1.5 billion in company

• 50-50 joint venture with Renault announced

• Stock trades at over 100 times its sales

Plug Power (PLUG.US), the US company focusing on fuel-cell products, has attracted investors' attention at the beginning of 2021. Share price is trading over 100% year-to-date higher. Two major partnerships that the company has agreed on recently are prime reasons behind the early-year rally. 

Overview

Plug Power is the US company developing hydrogen fuel cells for electric vehicles and other equipment. While the company has been around since the late 1990s, it has been focused on rather niche markets, like for example forklifts. However, things started to gain traction as more and more car makers started to explore electric vehicles for personal and commercial use. Solutions provided by Plug Power are said to be superior to lead-acid batteries as they allow significantly decreased recharging times. Share price of the company skyrocketed at the beginning of 2021 following announcements of 2 partnerships.

Partnerships

The first partnership was announced last week. South Korean conglomerate SK Group said that it will invest $1.5 billion in Plug Power, taking a 9.9% stake in the company. Plug Power and SK Group decided to launch a joint venture that will provide hydrogen fuel-cell solutions to the Asian markets. Transaction is expected to close in Q1 2021. However, less than one week later, the French carmaker Renault announced that it has also decided to form a joint venture with Plug Power. In this case, the aim of the JV is to create a major player in the European fuel cell light commercial vehicle market. Renault and Plug Power plan to win 30% share of the European market in this field.

Valuation and business concentration

While entering partnerships with two major companies can be seen as a confirmation that the company's business outlook is solid, the main source of concern is Plug Power's sky-high valuation. We are talking about a company with $32.5 billion market capitalization and just $314 million in revenue in Q4 2019 - Q3 2020 period (data for Q4 2020 is unavailable yet). The company is currently trading at over 100 times its sales! Not to mention that Plug Power is unprofitable. While the company has some big names among its customers, Amazon and Walmart accounted for a majority of its revenues in the past few years. Partnerships with Renault and SK Group will help diversify revenue stream but it will take some time before Plug Power can reap profits from them and until then its revenues will remain highly concentrated, creating risks on its own.

Plug Power (PLUG.US) has been trading in an upward channel since the end of October. However, stock launched a gargantuan rally on January 7 after partnership with SK Group was announced. Share price doubled since and is making double-digit gains almost on a daily basis. Some wild price swings occured yesterday but still the stock managed to finish trading significantly above previous close. As valuation looks stretched, traders should keep in mind that a correction may be looming. Source: xStation5