Plug Power shares are being sold in a tender offer. Should you buy on a dip?

Actions of Power supply by socket (SOCKET -13.87%) Shares of the company fell after the hydrogen fuel cell maker announced a secondary offering of shares to help it raise cash. The stock’s decline only compounded its recent woes, with its price having fallen more than 75% over the past year.

Let’s take a look at the energy company’s secondary offering and why the timing of this announcement is probably not good for the stock.

Plug Power needs to raise more funds

Plug Power announced last week that it would sell $200 million worth of stock in a public offering, or 78,740,157 shares at a price of $2.54 per share. That represents a discount of more than 13% to its closing price of $2.93 before the announced offering. The offering (which is expected to close by Monday, July 22) increased the number of shares outstanding by about 10.6%.

The company also updated its cash balance for the quarter ending in June, saying it had $62.4 million in cash and equivalents on its balance sheet and about $956.5 million in restricted cash. As of the end of the first quarter in March, it had $172.9 million in cash and equivalents on its balance sheet and $995.2 million in restricted cash. Plug Power’s restricted cash comes from prior sale/leaseback agreements that will be released over the term of the lease, as well as certain letters of credit secured by security deposits.

The update indicates another quarter of substantial cash burn for the company, which has had to deal with a business model with negative gross margins. This is due to the fact that Plug Power supplies hydrogen to its customers at a price lower than its fuel acquisition costs, although in the last quarter it even sold its equipment at negative gross margins.

In order to improve its business model, Plug Power has sought to build its own hydrogen plants to reduce costs and be able to make a profit on its hydrogen fuel sales. However, building hydrogen plants is not cheap and the company has also experienced construction delays.

Plug Power currently has two plants in operation, with a third expected to be completed by the end of the year. However, once fully operational, these plants are expected to meet only about 65% of the demand that Plug Power anticipates. In May, the company received a conditional commitment for a loan guarantee of up to $1.66 billion from the U.S. Department of Energy (DOE), which would go a long way toward helping the company finance its remaining projects. However, the potential loan has come under scrutiny, with U.S. Sen. John Barrasso, R-Wyoming and ranking member of the Senate Energy and Natural Resources Committee, requesting that the loan be studied before approval.

If the DOE loan is not approved, the company will have other options; however, these financing costs will likely be higher in the form of more dilutive capital raises or higher interest rate loans. In addition, traditional lenders may not be willing to finance the company given the current state of its business and cash burn.

Is It Time to Buy the Plug Power Dip?

At this point, buying Plug Power stock on the dip is probably not a good idea. Plug Power continues to burn cash and needed the proceeds from the tender offer to bolster its depressed cash position.

The timing of the IPO is not ideal. If the company were to report strong second-quarter results and provide encouraging guidance, it would have been better off going public after those results, when its shares could have been priced higher.

Plug Power hasn’t announced its earnings release date yet, but last year it reported its second-quarter results on August 9, so its earnings release isn’t that far away. The updated cash position already indicates that the company had another significant quarter of cash burn, meaning gross margin improvements may not have materialized.

Plug Power previously said it expected its hydrogen business to be close to gross breakeven in the fourth quarter. If it backtracks on that guidance, the stock could still have plenty of room to fall.

Right now, Plug Power remains a very speculative stock. If the company gets its low-cost government loan, builds its hydrogen power plants, achieves positive gross margin, and becomes profitable, the stock could have strong upside potential. However, a lot of things have to go right for that to happen. That’s why I think it’s best to continue to stay on the sidelines.