Plug Power, “Exhibit A” Why Most Hot IPOs Suck Long Term

Plug Power soared 50% on Thursday. With Friday’s gain, it has surged 68.4% in the first two trading days of the year. Not because it got a buyout offer from some company interested in alternative power generation for data centers or something, but because it made another one of its promising announcements. The stock has multiplied by a factor of seven since July to close at $2.61. Down from $1,500 in March 2000.

I would have ignored it, had it not been for my contact with the company and all the hoopla around it, during a fuel-cell consulting project in 1999 and 2000. PLUG was one of the hottest IPOs. At the end of October, 1999, it went public at $15.00 a share. In March, 2000, it broke the $150 mark. Or rather the $1,500 mark in today’s shares, after the desperate 1-10 reverse stock split in 2011 to maintain its listing on the Nasdaq!

The promising announcement? Plug saw “significant traction closing out 2013.” It expected bookings in the first quarter “to meet or exceed the fourth quarter of 2013,” for which orders “totaled approximately $32 million.” Finally, after 14+ years as a public company, the promise of real revenues. Not a lot of revenues, but hey!

During these years, Plug lost $820 million in investor money, nearly eating up the capital surplus it had pocketed from selling its crappy shares to the public and other investors. All along, losses exceeded revenues! In Q3, 2013, for example, it lost $16 million on $4.6 million in revenues. This takes some talent! At this rate, how much will it lose if it actually gets to $32 million in revenues in the first quarter?

In its IPO description, the company proclaimed:

We are a leading designer and developer of on-site, electricity generation systems utilizing proton exchange membrane (PEM) fuel cells for residential applications. Our goal is to become the first mass market producer of residential fuel cell systems by selling 100,000 of our systems per year by 2003.

Fourteen years later, they still haven’t sold 100,000 residential fuel cells. They sold hardly any. And they quit making them. Now they’re trying to sell fuel cells for pallet jacks and forklifts. The IPO description goes on:

The continued growth in demand for electric power, coupled with the ongoing deregulation of the electric industry, is creating a market opportunity for a variety of distributed, or on-site, generation technologies. We believe that the electricity our residential fuel cell systems will provide to homes can be less expensive, more reliable, more efficiently produced and environmentally cleaner than the electricity provided by the existing electric utility grid and other power generation technologies.

A lot of BS condensed into a small space.

But it wasn’t a fly-by-night. It started out in 1997 as a joint venture between Mechanical Technology and the Michigan gas and electric utility, DTE Energy. Other pre-IPO investors included Southern California Gas and GE Power Systems. Goldman was underwriting the IPO, and the president of GE Power Systems became a member of the Board. Plug was one hot dude.

Plug hyped its relationship with GE at every occasion to give investors confidence: GE Power Systems would be testing and evaluating the fuel cell, control Plug’s management, focus on achieving milestones, quality standards, and regulatory approvals, impose GE’s six-sigma quality standards, and get GE’s purchasing department involved in sourcing materials and components. This wouldn’t be a chaotic startup run by cool kids. GE had put Plug under its corporate wing and would buy its products. Nothing could go wrong.

That’s the impression they gave me when I met with them at their Latham, NY, office. However, they refused to show me their fuels cells, or anything remotely looking like a fuel cell. All other fuel cell developers I dealt with proudly showed off their rickety, mostly handmade contraptions. Plug gave me the impression that – despite the hoopla – it didn’t have a lot to show.

Then things hit the fan publically. In early May, 2000, as its stock was already crashing, Plug announced that initial pre-commercial units of residential fuel cells would require grid power to operate. Say what? It was an absurdity: a residential power generator that needed electricity from the grid to generate electricity from natural gas! This change in product specs violated the agreement with GE Power Systems. Its subsidiary, GE MicroGen, would no longer be obligated to buy the first 485 pre-commercial units for $21,000 each. This could cause a revenue shortfall of $10,000,000. Plug’s confession kicked off a litany of unfulfilled promises.

Fuel cells are an old technology. In 1839, the first fuel cell generated electricity from hydrogen and oxygen in a process that was essentially the reverse of electrolysis. Fuel cells have been in use for decades. They provided the electricity on the space shuttles, for example. But they ran on pure hydrogen and oxygen. That’s the problemita, even today: hydrogen, a notoriously tricky gas, does not occur freely on earth and has to be split from other elements, such as oxygen (water) or carbon (natural gas, etc.) through a costly, inefficient process…. So, fuel cells were a promising technology in 1839, and they remain a promising technology.

But buyers of Plug’s stock had no clue about the inherent and perhaps commercially insurmountable challenges. For Plug, it was all about hype. Fuel-cell hype was so thick you could cut it with a knife. And Plug’s hype was head and shoulders above the rest. For Goldman and others that extracted fat fees from the IPO, it was about money – that is, getting other people’s money. Then they ran. And Plug become a giant money suck.

Over the years, there have been thousands of IPOs like Plug. Shares were unloaded with huge amounts of hype on a bedazzled public. Many of the companies didn’t stick around long because they ran out of cash. Now it’s happening again. The IPO boom is on, the smart money is selling, Wall Street is extracting fees, and the bedazzled public is paying the price.

Some of the IPOs will be long-term successes. There might even be the next Google or Facebook, and they will be held up as enticement for the public to jump in and drive up the price. IPO fever can only happen when the stock market is blindly exuberant, when people are buying because everyone else is buying, when earnings don’t matter, and when no price is too high. These periods come in waves. Investment banks and the smart money know this. They create it, they time it, and when they have a “healthy” market for IPOs, they extract their money, and they run. Retail buyers end up holding the bag. A time-honored Wall Street ritual.

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