Plug Power develops hydrogen-fuel cell systems.
Toru Hanai/Bloomberg
Hydrogen-fuel cell company Plug Power is restating financial statements from the past few years because of widespread accounting errors, triggering a big selloff Wednesday.
Plug (ticker: PLUG) stock is down about 11% in early trading to about $38 a share. The S&P 500 is down about 0.5%. The Dow Jones Industrial Average is up slightly.
In a statement, the company said the mistakes were related to complex financing accounting with customers, loss estimates for service contracts and classification of expenses on its income statement.
Plug wasn’t immediately available to quantify or clarify the restatements.
Investors hate accounting restatements. It can undermine confidence in any company. All investors have, essentially, to value and evaluate companies, is reported numbers.
Cowen analyst Jeffery Osborne doesn’t seem worried about the mistakes. He reiterated his Buy rating on Plug stock Monday. “We view the weakness as a unique buying opportunity,” wrote Osborne. “While restating results is never a positive, the root cause of the restatement has nothing to do with future growth markets, and we note that there was no cash impact.”
Osborne is focused on the customer contract accounting. Some customers, namely Walmart (WMT) and Amazon.com (AMZN), have warrants to buy Plug stock, an arrangement that led to negative sales in the fourth quarter. Essentially, the warrants became so valuable that customers received equipment for less than nothing. Plug stock rose almost 1,000% in 2020 which is why the warrants were so valuable.
Truist analyst Tristan Richardson, though, downgraded Plug shares Wednesday to Hold from Buy, and cut his price target for shares to $42 from $65. “While the company reiterated long-term targets and the accounting issues appear transitory in nature, we see limited upside until resolution,” the analyst wrote in Wednesday a report.
The revenue/warrant issue, however, might not be the primary reason that shares are down. Plug is also moving expenses from research and development up to cost of goods sold. The total impact on profit margins is nothing, but the change does reduce gross profit margins, which matters to investors because gross profit margins are used to get a sense of how profitable a business can be. The company doesn’t earn full- year profits yet.
“It is usually not that difficult to determine whether costs belong above or below the [gross margin] line so a restatement in such a case is always a little troubling,” accounting expert Robert Willens tells Barron’s.
Willens hasn’t looked at the Plug restatement, but has looked at many difficult accounting situations. “Since loss [estimates] are uniquely within the province of management, who has the requisite expertise to evaluate the worth of service contracts, the fact that KPMG had to step in and question the extent of the company’s loss accruals is also a bad sign.”
For now, investor agree with that sentiment.
Write to Al Root at allen.root@dowjones.com
