Plug Power Shares Sell Off on Stock Offering. Should You Buy on the Dip?

Shares of Plug Power (NASDAQ: PLUG) were sinking after the hydrogen fuel cell producer announced a secondary stock offering to help it raise cash. The downward move in the stock only added to its recent woes, with its price now plunging over 75% in the past year.

Let's look at the energy company's secondary offering and why the timing of this announcement likely is not good for the stock.

Plug Power needs to raise more cash

Plug Power announced last week that it would sell $200 million worth of shares in a public offering -- selling 78,740,157 shares at a price of $2.54 per share. That was an over 13% discount to its closing price of $2.93 before the announced offering. The offering (to be completed by Monday, July 22) increased its shares outstanding by about 10.6%.

The company also updated its cash balance for the quarter ending in June, noting it had $62.4 million in cash and equivalents on its balance sheet and restricted cash of approximately $956.5 million. At 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 stems from prior sale/leaseback agreements that will be released over the lease term, as well as having some letters of credit backed by security deposits.

The update indicates another quarter of substantial cash burn for the company, which has been struggling with a business model that has negative gross margins . This stems from Plug Power providing hydrogen fuel to its customers below its costs to acquire the fuel, although last quarter, it even sold its equipment at negative gross margins.

In order to help improve its business model, Plug Power has sought to build its own hydrogen plants in order to lower costs and be able to make a profit on its hydrogen fuel sales. Building hydrogen plants is not cheap, though, and the company has also run into some construction delays.

Currently, it has two plants operational, with a third expected to be completed by the end of this year. However, when fully ramped up, these plants are still expected to meet only about 65% of where Plug Power sees demand headed. In May, the company received a conditional commitment for an up to $1.66 billion loan guarantee from the U.S. Department of Energy (DOE), which would go a long way in helping the company finance its remaining projects. However, the potential loan has been the subject of scrutiny, with U.S. Sen. John Barrasso, R-Wyoming, a ranking member of the Senate Committee on Energy and Natural Resources, asking the loan to be investigated before being approved.

If the DOE loan is not approved, the company would have other options; however, these financing costs would most likely come at a higher cost in the form of more dilutive equity raises or higher-interest loans. In addition, traditional lenders may not want to finance the company given the current state of its business and cash burn.

Image source: Getty Images.

Is it time to buy the dip in Plug Power?

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

The time of the offering, meanwhile, is not ideal. If the company was going to report strong Q2 results and offer encouraging guidance, it would have been best served to have done the stock offering after it reported these results when its stock could have been at a higher price.

Plug Power has not yet announced its earnings date, but last year it reported its Q2 results on Aug. 9, so its earnings report is not that far away. The updated cash position already indicates that the company had another big quarter of cash burn, which means gross margin improvements may not have materialized.

Plug Power previously said it expected its hydrogen business to be near gross margin breakeven in the fourth quarter. If it walks back that guidance, the stock could still have a lot more room to fall from here.

At this time, Plug Power remains a very speculative stock. If the company gets its low-cost government loan, builds out its hydrogen plants, gets gross margin positive, and turns profitable, the stock could have a lot of upside. However, a lot has to go right for that to happen. As such, I think it is best to continue to stay on the sidelines.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .