Best Buy: Plug Power vs Ballard Power Systems

Over the past year, Connect the power (NASDAQ: PLUG) the share rose 1330%. At the same time, the peers Ballard Power‘s (NASDAQ: BLDP) the share rose “only” by 217%. The craze for renewables in general, and hydrogen in particular, has caused both companies’ shares to skyrocket. But is there more room for these stocks to run? And is one of the two fuel cell companies a better buy than the other? Let’s find out.

Plug Power increases revenue faster

Plug Power and Ballard Power both offer Proton Exchange Membrane (PEM) fuel cells, the most commonly used fuel cell technology today. These produce electricity by using a fuel, such as hydrogen, as input. Fuel cells have applications in the material handling market (in forklifts), heavy vehicles, such as buses and trucks, and passenger cars. These are also used in stationary power generation. Although a majority of hydrogen is currently derived from natural gas, hydrogen fuel cells are being promoted for their potential as a clean fuel, where hydrogen is derived from water through electrolysis.

While Plug Power and Ballard Power have both increased their revenues steadily, the growth of Plug Power has been faster. Until now, Plug Power’s key market has been forklifts. The company has acquired important customers, including Amazon and Home deposit, which has helped to increase its sales in recent years.

PLUG income (annual) given by YCharts

As the graph above shows, Plug Power has managed to grow its revenue at a faster rate than Ballard Power over the past five years or so.

As the two companies expand into all segments and geographies, Plug Power recently concluded Partnership with the French car manufacturer Renault. European automakers are the key target group for Plug Power, given the hydrogen surge in Europe.

By comparison, Ballard Power has made strides in China. It has formed a joint venture with Weichai Power, one of the leading manufacturers of engines and auto parts in China. Weichai acquired an almost 20% stake in Ballard Power. The joint venture plans to build approximately 2,000 fuel cell modules by 2021.

Ambitious growth plans

Plug Power and Ballard Power have set ambitious plans to increase revenue and operating profit. Plug Power plans to grow its annual revenue from $ 327 million in 2020 to $ 1.7 billion in 2024, a compound annual growth rate of 50%. Considering its five-year average revenue growth rate of around 35%, that sounds a bit ambitious. The company also plans to generate $ 200 million in operating revenue by 2024. That sounds pretty unrealistic.

PLUG Operating Revenue (Quarterly) Graph

PLUG Operating Profit (Quarterly) given by YCharts

As the graph above shows, Plug Power has not been able to generate positive operating profit in more than 20 years of operation. In its plan for 2024, Plug Power expects significant growth in revenues from new markets, such as electric vehicles, as well as the green hydrogen market through its sales of electrolysers. However, although lower in percentage terms, material handling represents the greatest growth in absolute amount. This activity contributed approximately 94% of Plug Power’s 2020 revenue, amounting to $ 292 million. The company expects materials handling to contribute about $ 750 million to its total revenue in 2024.

Close up of a white colored hydrogen car.

Image source: Getty Images.

Notably, Plug Power has not been profitable in this segment in recent years. The company hopes to achieve positive operating profit through a combination of increased scale and reduced costs – a dynamic that has been at play throughout these years. Despite significant cost reductions – the costs of its key material handling product GenDrive have been cut to less than half in 10 years – Plug Power has not become profitable so far. It could achieve operational profitability by 2024, but I don’t see a new catalyst to help it. The markets for electric vehicles and electrolyzers could be different, but they will not contribute enough by 2024 to make a major difference in Plug Power profits.

Ballard Power’s plans seem higher than Plug Power’s. The company hopes to achieve annual revenue of $ 5.2 billion by 2030. That’s a 46% CAGR over its expected 2020 revenue of $ 115 million. Over the past five years, Ballard Power has grown its sales at an average rate of approximately 21%.

PLUG Revenue Graph (Quarterly YoY Growth)

PLUG revenue (quarterly growth year-on-year) given by YCharts

Likewise, the company’s expectations of a 20% margin for profit before interest and taxes are not supported by a concrete plan. And we haven’t even reached the bottom line yet. Factor in interest charges as well as dilution effects, and the story sounds fancy.

Overall, Plug Power and Ballard Power’s plans seem overly ambitious. In addition, the current valuations of equities are price in even higher growth than these plans suggest.

The best buy is …

Based on recent revenue growth and plans, Plug Power looks better than Ballard Power. However, both stocks face major risks, particularly related to the growth of hydrogen as a fuel. The growth of battery-powered vehicles may limit the adoption of hydrogen fuel cells in mobility applications. In addition, companies’ growth plans are based on many optimistic assumptions, which may not materialize. Not only do these stocks carry significant risk, but they also trade at huge valuations. Renewable energy investors can find better options elsewhere.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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