A hedge fund explained why it is betting against Plug Power stock.
Toru Hanai/BloombergHighflying hydrogen stock Plug Power is falling after a short seller took aim at the stock.
Kerrisdale Capital Management is a hedge fund with about $700 million under management. It has a short position in Plug Power (ticker: PLUG) stock, meaning it is betting the shares of the hydrogen fuel cell technology company will fall. The fund outlined its thinking in a lengthy report released Wednesday morning.
Kerrisdale believes the hydrogen economy is over-hyped. The report, however, isn’t only about market euphoria regarding hydrogen technologies. The fund also unearthed a couple of market and company-specific risks that Plug investors might, at minimum, want to think about.
Plug wasn’t immediately available to comment on the short seller’s report. But most Wall Street analysts covering Plug Power say to buy the stock.
Bullish Plug investors, however, can take some solace because this report isn’t like the one Hindenburg Research released on another hydrogen play, Nikola (NLKA), this past fall. Hindenburg alleged Nikola misled investors, but Nikola denies those claims. Nikola stock is down roughly 60% from levels seen before Hindenburg’s report was published
First the hedge fund sees the nature of hydrogen gas production as a broader market issue. Hydrogen gas, when burned or used in a fuel cell to generate electricity, doesn’t emit any carbon dioxide, one of the greenhouse gasses blamed for global warming. Plug Power’s forklifts, of course, use hydrogen gas.
But the problem, according to Kerrisdale, is that the process of producing hydrogen gas itself does generate carbon dioxide. Most hydrogen comes from natural gas, and carbon dioxide—as well as hydrogen gas—are produced during processing.
Hydrogen bulls believe that hydrogen gas can eventually be produced by passing renewably-generated electricity through water—breaking it into its two elements, hydrogen and oxygen. But Kerrisdale questions the cost and efficiency of using electricity and water to create enough hydrogen to power the economy. “Using hydrogen at mass scale ...would require trillions of dollars of investment in electrolyzers, fuel cells, and completely redesigned and rebuilt pipeline networks,” the report reads. “Even then we’d be wasting a huge proportion of the electricity produced at the electrolyzer power plant due to.....inefficiencies.” Those inefficiencies are things such as the need to compress hydrogen and store it under pressure.
Bulls know that electrolysis is pricey, but expect costs to fall in coming years as more capital enters the industry.
The fund instead believes lithium-batteries are more efficient and practical, but didn’t discuss other positions beyond Plug. Batteries are one of the key risks they see for Plug stock. Plug sells hydrogen-powered forklift systems, which could be disrupted by battery-powered units. Falling or flattening sales in Plug’s core business could hurt investor sentiment.
Plug’s sales are expected to hit about $423 million in 2021, up from about $300 million expected in 2020. Plug Power will report full-year 2020 numbers in a few more weeks.
The other risk highlighted in the report is customer concentration. More than 60% of Plug sales currently come from Walmart (WMT) and Amazon.com (AMZN).
Amazon and Walmart also hold Plug Power warrants, which might have been an incentive to purchase Plug’s systems. After the warrants vest, there could be a dip in demand with the two large customers, essentially, done purchasing, the hedge fund report says. “We believe a substantial portion of Plug’s 2020 and 2021 revenue is actually a pull-forward by Amazon and Walmart to vest their warrants at attractive terms,” writes the fund.
Wall Street, for its part, doesn’t appear to agree with Kerrisdale. About 85% of analysts covering Plug Power rate share Buy. The average Buy-rating ratio for stock in the Dow Jones Industrial Average is about 57%.
Analysts are excited about more hydrogen-related infrastructure spending under a Biden administration, as well as an increasing focus on climate change around the globe. Plug also plans to extend its fuel-cell technologies into additional markets, such as heavy duty trucks.
Kerrisdale versus the Street is a classic bear-bull debate for a highflying stock. Plug stock is up almost 1,400% over the past year. Shares, however, fell about 7% on Wednesday after the report. The S&P 500, for comparison, was up 1.2%.
Write to Al Root at allen.root@dowjones.com
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