Monday, May 12, 2014

* Plug Power (PLUG) - Earnings Preview & All the Facts. Is the Option Market Under-pricing Risk?

PLUG is trading $3.82, up 2.7% with IV30™ up 0.1%. The Symbol Summary is included below.

Provided by Livevol

UPDATE 5-13-2014

PLUG is popping today, ahead of the earnings release tomorrow morning . The stock is up 10.5%.

Provided by Livevol

At the bottom of this article I show that the price range reflected by the option market for PLUG earnings (as of yesterday) was [$3.47, 4.53], and I believe that is too tight a range.  In order for that  range to hold now, PLUG will need to go down off of earnings (but not a lot).

Update coming tomorrow.

This is a pre-earnings note in perhaps the single most followed retail stock on the planet (perhaps other than AAPL).

Before we get into earnings, we must first look at this thing that has become PLUG stock.  My most read article to date is this:

Plug Power (PLUG) - The Facts; The Growth; The Financials; The Revenue;... The Risk of Bankruptcy by 2016 is ~15%.

Let's review some key metrics from that post and then get into what I see is a real opportunity in PLUG earnings.

This is about the phenomenon that is PLUG. A stock that was $0.15 less than two-years ago and hit as high as $11 a few months ago[].  So here are some facts...

1.PLUG has been a publicly traded company for ~15 years. This is not a "new stock."

2. A lot of the excitement however surrounds new technologies, new markets and new technological uses, which may in some sense make PLUG "brand new." Let's turn to the financials, which at a glance, do bear this out.

The first image displays PLUG annual revenues from 2010-2013 and then projections from Reuters for 2014 and 2015.

Provided by NASDAQ; Estimates via Reuters

That jump from 2013-2015 is very exciting.  In actual numbers, that's $26 million to $116+ million. But... what about everything else?

Now let's turn to realized operating income from 2010-2013.

Provided by NASDAQ

Not very good, but 2013 is certainly the best of the bunch and growth companies run at losses for substantial periods of time and still see stock appreciation.  But... here's where the worry begins.

Let's turn to revenues vs. cost of revenues for PLUG, below.

Provided by NASDAQ

Whether you look at the chart or the actual numbers, there is zero evidence that the firm is getting more efficient at production.  In fact revenue was higher and cost of revenue were lower in 2011. 

But, there is some operating efficiency.  Check out the table and chart of revenue to SG&A (selling, general & administrative costs).

Provided by NASDAQ

There's a chart bulls can get behind.  Revenue has been even for 2011-2013, but SG&A has been dropping.  That's one source of efficiency.  But, what about that operating income chart?  Why isn't EBIT rising if SG&A is dropping and COGS are staying constant?

Here's  a final chart of "Additional Income or Expense Items."

Provided by NASDAQ

PLUG went from $5M in additional income to now $33.7M in additional expenses.  But that's OK, right?  The additional expense is due to higher revenue in 2014 and 2015. Or is it?

If revenues are growing from $26M to $65M in one-year ($39M gain), isn't that all but guaranteed to be wiped out with ~$34M in "additional expenses?"  Consider that we haven't seen any production efficiency in the financials relative to cost of revenue, that extra revenue just looks more expensive than the prior revenue. I mean, is $10 in revenue worth anything if it costs $11 in expenses?

OK, now let's turn to today (5-12-2014)

The Charts Tab (two-years) is below.

Provided by Livevol

So, yeah, we see a crazy run up as the firm has signed deals that will expand revenue massively in the next two-years.  There was a bit (or more than a bit) of a bubble as the stock popped to $11.  The deflation has been equally abrupt, and one could ask if perhaps the run down has been as overdone as the run up.  Time will tell.

But here's where the opportunity exists... It's all in the options.  Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

IV30™ measures the risk (implied volatility) for the next 30-days as reflected y the option market.  What we see in the chart above is that the vol as of now (just one day prior to earnings) is significantly lower than the volatility we saw just a couple of months ago.  It's actually breathtaking just examining the chart.

The option market reflects less risk -- a lot less risk now than it did in March.  If you agree, then you're in line with the option market.  If, however, you believe this earnings announcement has similar risk to the prior release, then you implicitly have a very strong opinion: the option market has mis-priced the risk.  More on that in a sec.

The Skew Tab snap (below) illustrates the vols by strike by month.

Provided by Livevol

We can see that the skew is parabolic.  The option market does reflect two-tailed risk (upside and downside).  This shape of skew is "abnormal" but is in fact normal for this type of event.

To read more about skew, what is and why it exists you can click the title below:
Understanding Option Skew -- What it is and Why it Exists.

Finally, the Options Tab is included below.

Provided by Livevol

Here's how to see what the option market is pricing.

1. Find the at-the-money strike: In this case, with PLUG trading at $3.82, the $4 strike is closest to that price.

2. Add the calls and puts (a straddle) on that strike: $0.175 + $0.35 = $0.525

3. Price the stock range: Take the value of the straddle and subtract from the strike from the lower level  of the range and add to the strike for the higher level of the range:

[$4 - $0.525, $4 + $0.525] --> [$3.47, 4.53]

So, the option market reflects that price range by the end of trading on May 16th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.
I also note that the $3 strike puts and the $5 strike calls are @ $0.05.  Hmmm....

This is trade analysis, not a recommendation.

Legal Stuff:
Options involve risk. Prior to buying or selling an option, an investor must receive a copy of Characteristics and Risks of Standardized Options. Investors need a broker to trade options, and must meet suitability requirements.

The information contained on this site is provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. I am not engaged in rendering any legal or professional services by placing these general informational materials on this website.

I specifically disclaim any liability, whether based in contract, tort, strict liability or otherwise, for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with access to or use of the site, even if I have been advised of the possibility of such damages, including liability in connection with mistakes or omissions in, or delays in transmission of, information to or from the user, interruptions in telecommunications connections to the site or viruses.

I make no representations or warranties about the accuracy or completeness of the information contained on this website. Any links provided to other server sites are offered as a matter of convenience and in no way are meant to imply that I endorse, sponsor, promote or am affiliated with the owners of or participants in those sites, or endorse any information contained on those sites, unless expressly stated.


  1. This site helped me know things that I did not know before. Keep it up guys.

  2. Please Ophir Gottlieb publish a new report about PLUG as of start 2015...