Plug Power: How Big Can It Become?

On February 26, Plug Power ($PLUG) confirmed that the order it received on January 10 was from Wal-Mart ($WMT). To understand the importance of Wal-Mart’s role in the hydrogen market we wrote Plug Power Cracks the Hydrogen Code.

It took about fifteen years and close to $1.0 Billion of investment for PLUG to crack the code. Throughout its life as a public company you can think of PLUG as a long-term venture investment experimenting in search of a kick-ass business model suited for a very large market opportunity. The experiment has been completed. Now in order to fully realize a venture type of return on investment, $PLUG must push the pedal to the metal on two fronts.  First, they need to leverage their position as a market leader in the hydrogen-powered material handling space to go after the established lead acid battery technology.  Second, and simultaneously as much as possible, PLUG needs to use its customer base to aggressively exploit the opportunities in adjacent markets such as airport Tuggers, Transportation Refrigeration Units (TRUs), Range Extenders (REs) and so forth.

PLUG’s GenKey offering is miles away from any hydrogen fuel cell competition.  From a strategic point of view, the validation its clients (for example, Wal-Mart) provide reduces its sales cycle. PLUG has now great relationships with industry leaders, which makes GenKey a much easier decision for prospective new customers and existing customers alike.  Also, these relationships should insulate it from competitors for years to come. We believe the latest Wal-Mart deal confirms the solution-market thesis. This became clear to us when Wal-Mart chief of distribution logistic presented via a video webcast at the analyst day in Albany, NY in December. I don’t remember the bearish bloggers attending this conference…

When we first bought stock in this company at $0.23, we knew it had potential.  When it hit an intraday high of $11.72 on March 11, the market cap soared to $1.2Bn.  Of course the bearish bloggers had a field day with this, but we feel this raises the key question: How Big Can Plug Become?  To answer this question, one must assess the size of the current opportunity and its position in the competitive landscape. Its leadership position in hydrogen power can’t be denied.

Let’s see if we can figure out how big this opportunity can be on a global basis. The latest management presentations give us some important metrics that we can use to assess the total global opportunity.

Material Handling Market (GenKey offering: Batteries, Molecule, Service, Infrastructure: Source internal calculation): 6,000,000 global units at $6000 of revenues per year per unit over the lifetime of battery = $36 Billion per annum = maximum boundary condition (Total potential US market for GenKey product).

Tuggers (Source: management): Could be a $60 million business for $PLUG. This is by far the smallest opportunity.

Transportation Refrigeration Units (TRU’s) (Source: management): $15 billion+

Range Extenders (RE’s) for battery-operated vehicles (Source: management): $10 billion +

Other Adjacent Markets: Unknown, but there is potential.  As an example, range extenders could eventually make electric vehicles more practical for longer distance travel.

The total market opportunity for $PLUG is $61 billion +.

Now let’s calculate how big the annual Wal-Mart opportunity is:

Wal-Mart has 117 Distribution Center (DCs) in The US (Source: Internet). 100 of the DCs can be converted using the GenKey solution. We know that over a period of 6 years each DC represents a $9 million revenue opportunity for PLUG (Source: Management). Therefore the total US Wal-Mart opportunity is $150 million a year. That is 1 client and we know PLUG has now more than 24 clients, most of them located in the US.

At a market valuation of $700 million, Plug is valued 4.7 times its WMT annual potential revenue opportunity. WMT owns less than 0.5% of the global number of forklift (6,000,000 units: Source Management)

Let’s look at the total potential just with existing customers.  As of December, existing PLUG customers (including WMT, SYY, and KR) owned about 250,000 total forklift trucks, of which only 4000 were PLUG powered trucks  The remaining 246,000 trucks could all present the “low hanging fruit” opportunity for PLUG.  Assuming a lifespan of 6 years (PLUG’s management says about 6-10 years depending on usage), the revenue opportunity is $1.6bn / year … and that is without acquiring a single new customer. 

Some investors will start focusing on P/E, EV to EBITDA, and all sorts of metrics to value PLUG. We think that for the time being these methods will blind investors. PLUG should be priced more like a venture capital investment in relation to its potential market and its leading position.

Short-term or momentum traders have gotten involved in the stock given the run-up since December.  While this has certainly brought attention to the company, the volatility is unsettling for some investors. 

The company will look expensive for probably this decade and its rate of growth should explode very soon. This could be a $10 billion company in 10 to 15 years.

Written by Michael Bigger.

Disclaimer: Bigger Capital, LLC, Bigger Capital Fund, LP, Bachelier, LLC and the Bigger family hold a very large stake in Plug Power. We have a very long term horizon that differs from the majority of investors. These high growth situation are often not suitable for most investors since they are extremely volatile and can realize their full potential over decades.