The accounting short circuit that shocked Plug Power’s share price

Plug Power’s [PLUG] share price has been on a downward trend since the company flagged accounting errors last week. Shares in the hydrogen fuel-cell maker fell 8.1% when it announced the news on 16 March and continued to decline over the subsequent two sessions before ending the week down 17.6% at $38.28.

Plug Power’s share price has declined 36.71% so far in March (through 24 March), despite climbing 42.7% during the first two months of the year. Overall, the stock was up just 3.2% year-to-date as of 24 March’s close, underperforming the S&P 500’s 5.09% rise in the same period.

According to ETF.com, circa 50.8 million Plug Power shares were held in ETFs across the US. The iShares Global Clean Energy ETF [ICLN] was the stock’s biggest holder, with a weighting of 7.42% on 24 March.

  

The fund has fallen 21.9% in the YTD to 24 March, underperforming Plug Power’s share price and the broader market. In comparison, the Invesco WilderHill Clean Energy ETF [PBW], which has been the best-performing fund in the past 12 months with the stock as a holding, was down 12.82% in the same YTD period — it had a 1.85% weighting in the stock on 24 March.

 

A miscalculation

Plug Power made its shareholders aware of the accounting errors on 16 March, saying that its auditor — KPMG — had found inaccuracies related to several non-cash items, such as the impairment of certain long-lived assets.

The company said that it was required to restate its financial statements for fiscal years 2018 and 2019 and quarterly filings in 2019 and 2020. The revised accounting is expected to change how it handles certain transactions and items going forward. However, Andy Marsh, CEO of Plug Power, doesn’t expect it to impact any other part of the business.

The company still expects to post 2021 gross billings of $475m, within the target it forecasted in its fourth-quarter 2020 earnings report and up from the $450m that it recorded in the previous quarter. Plug Power sees gross billings growing to $750m in 2022 and $1.7bn in 2024.

  

Analysts appear to have mixed opinions about how the accounting misstep will impact the company in the long term. Jeffrey Osborne, MD and senior research analyst at Cowen, doesn’t see it as an attempt to “cook the books”, according to MarketWatch.

“While restating results is never a positive, the root cause of the restatement has nothing to do with future growth markets,” Osborne said in a note seen by the publication. “[It] was a true error in sale leaseback accounting reporting and not a nefarious event.”

Indeed, Colin Rusch, MD and senior research analyst at Oppenheimer, notes that other companies have had to restate financials due to changes in standards relating to lease and service transactions.

However, day trader Henrik Alex wrote in Seeking Alpha that he believes investors should prepare for “material impairment charges and a meaningful reduction in reported gross margins”. Given that it will likely take some time to review three years’ worth of financial results, he expects Plug Power’s shares to remain range-bound until it does.

 

Time to unplug?

The clean energy space has been a popular play among investors, particularly the nascent fuel cell market.

However, the recent rally seen from Plug Power and its peer FuelCell Energy [FCEL] could be “bordering on mania”, according to the managing partners at Goehring & Rozencwajg Associates. The natural-resource investment firm warned clients of stretched valuations, going on to highlight that this leaves investors vulnerable to any setback, according to Bloomberg.

The firm drew parallels to when FuelCell Energy’s valuation had a 113 enterprise-value-to-sale ratio in 2000, or almost double its current ratio of 58, the publication noted.

“A decade ago, a series of failed promises and bankruptcies plagued the battery industry, making it nearly impossible for subsequent ventures to find financing and move forward. We worry the same could occur on a much larger scale if tens of trillions of ‘green’ investments are eventually written off” - Goehring & Rozencwajg Associates

 

“A decade ago, a series of failed promises and bankruptcies plagued the battery industry, making it nearly impossible for subsequent ventures to find financing and move forward,” Goehring & Rozencwajg Associates wrote. “We worry the same could occur on a much larger scale if tens of trillions of ‘green’ investments are eventually written off.”

The stock is rated a moderate buy among 12 analysts polled by TipRanks, with an average price target of $60.25, representing an 81.48% climb from Plug Power’s share price as of close on 24 March.