Shares of Plug Energy (NASDAQ: PLUG) surged in Could after the corporate introduced that it had obtained a conditional dedication for a $1.66 billion mortgage from the U.S. Division of Vitality (DOE). Nonetheless, the inventory is now properly under the place it was earlier than the announcement, and one U.S. senator has known as the mortgage into query.

The inventory, in the meantime, is now down over 70% up to now yr.

Let us take a look at the proposed DOE mortgage, why it’s being known as into query, why it’s so vital for Plug Energy, and whether or not the slide within the inventory is a shopping for alternative.

Fixing a flawed enterprise mannequin

Plug Energy has lengthy been grappling with a flawed enterprise mannequin, which it has got down to repair. The corporate initially discovered a distinct segment promoting gasoline cells utilized in forklifts and different material-handling gear to firms with high-volume, three-shift warehouses like Amazon and Walmart.

However the flaw in its enterprise mannequin was that it could promote the hydrogen gasoline wanted to run its gasoline cells at a loss. This could possibly be seen within the firm’s most up-to-date outcomes, the place destructive led to a $159 million gross loss.

Simply to emphasise how unhealthy that is, the loss was measured earlier than any company prices. The corporate loses some huge cash on the hydrogen gasoline it sells, though within the first quarter, it additionally misplaced cash on the gear it offered.

Clearly, buying or making one thing for $3 after which promoting it for $1 just isn’t a sturdy enterprise mannequin, however that’s fairly near what Plug Energy did final quarter with hydrogen gasoline. Over time, the corporate has principally obtained hydrogen from third events and offered it to its prospects at an enormous loss.

Because of this it has launched into constructing a community of its personal hydrogen vegetation that may produce gasoline that it may promote to its prospects for a revenue.

That is the place the DOE mortgage is available in. In Could, the corporate was given the prospect to safe the mortgage — if sure situations to be negotiated by the corporate and the federal government are met — to assist it construct out its hydrogen plant community. Whether it is authorised, the mortgage would assist fund as much as six inexperienced hydrogen manufacturing amenities.

Plug Energy already has two vegetation up and operating, and one other is predicted to be full by the tip of the yr, and that will meet about 65% of the place it sees demand headed.

The mortgage would assist create a big plant in Texas scheduled for subsequent yr that will meet its buyer wants and permit it to increase past that.

Nonetheless, in June, Sen. John Barrasso, a Republican from Wyoming who’s the rating member of the Senate Committee on Vitality and Pure Assets, requested the DOE’s inspector common to analyze “any potential impropriety” by the the DOE’s Mortgage Applications Workplace and the mortgage program’s director, Jigar Shah, resulting from attainable conflicts of curiosity. The senator additionally questioned Plug Energy’s viability given its $1.4 billion in losses final yr.

Whereas Plug Energy might pursue financing elsewhere if the mortgage finally doesn’t get authorised, the phrases and rates of interest would undoubtedly be a lot much less favorable. And given the corporate’s monetary place and destructive , there isn’t a assure it could be capable to discover an establishment to lend it the cash.

Is the sell-off a shopping for alternative?

Plug Energy shares shot up as a lot as 70%, to $4.90, within the day after the DOE mortgage provide was introduced. As we speak it’s buying and selling greater than 15% under the place it was earlier than the announcement.

If the mortgage is authorised, there needs to be some instant upside potential given the previous response and the place the inventory now trades. Nonetheless, that could possibly be short-lived.

Plug Energy, in the meantime, has mentioned it’s seeking to get to gross margin breakeven in its gasoline enterprise within the fourth quarter, which might not be depending on the mortgage. That could be a potential catalyst, however a break-even gross margin remains to be not a whole resolution as a result of it is not going to make the corporate worthwhile or begin producing money.

At this level, I’d view Plug Energy extra like a lottery ticket. If it will get the mortgage, builds out its vegetation, and turns constructive in gross margin and free money circulation, there could possibly be great upside within the inventory. However identical to most lottery tickets, there may be additionally the prospect it turns into nugatory.

Must you make investments $1,000 in Plug Energy proper now?

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John Mackey, former CEO of Entire Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Amazon and Walmart. The Motley Idiot has a .

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