Better Buy: Plug Power vs. Canadian Solar

Repeatedly finding themselves in the headlines this summer, electric-vehicle stocks arguably make up the hottest niche of the renewable energy industry. But investors who are drawn to the clean energy industry should recognize that there are plenty of options to consider beyond Tesla, Nikola, and their peers.

For example, the fuel cell and solar industries also represent worthy choices for those who want to power their portfolios with green investments. So let's consider two of the most recognizable companies in their respective fields: Plug Power (NASDAQ: PLUG), a leader in fuel cell solutions, and Canadian Solar (NASDAQ: CSIQ), a stalwart in solar panel manufacturing.

A man stares at illustrations of moneybags and question marks.

Image source: Getty Images.

Bulls are running with the idea that...

Skyrocketing more than 180% year to date, shares of Plug Power have soared in 2020, extending the 149% run-up they experienced in 2019. Why? Primarily, investors are growing more confident that the company is on track to meet management's 2024 projection of generating sales of $1.2 billion, operating income of $170 million, and adjusted EBITDA of $200 million.

Fortifying its position as an industry leader, Plug Power completed two acquisitions in June that will help the company become a formidable competitor in hydrogen generation. Moreover, it recently revealed its plan to diversify its business and enter the large-scale stationary power market.

Unlike its bankrupt peers Sungevity, Solyndra, and SolarWorld, Canadian Solar has prospered over the past two decades, and investors are confident that plenty of sunny days remain. In 2020, for example, Canadian Solar forecasts solar module shipments of 11,000 megawatts (MW). Should the company achieve this guidance, it will represent a compound annual growth rate of 34% since 2010, when it shipped 803 MW.

The company's supporters will also point to Canadian Solar's burgeoning energy business, which deals in the development of solar power projects. Currently, it has 1 gigawatt-peak (GWp) in operation, with 3.7 GWp in backlog and 12 GWp in the pipeline. Additionally, Canadian Solar's focus on the energy storage market is also a source of enthusiasm since the company has 2,820 megawatt-hours of storage projects in the pipeline.

But bears believe it's better to be cautious because...  

For those pessimistic about Plug Power, the company's financials have them feeling more enervated than energized about the future. While the company has a track record of growing its top line, it has simultaneously repeatedly failed to generate both profits and cash flow.

PLUG Revenue (Annual) Chart

PLUG Revenue (Annual) data by YCharts..

While bears may be impressed with some of the company's recent accomplishments, they remain circumspect about the company's ability to translate these successes into actual profits. In addition, the company's consistent reliance on raising capital through the issuing of equity (shares outstanding have risen from 13 million in 2010 to 237 million in 2019) suggests further dilution awaits current shareholders.

For Canadian Solar's skeptics, the very nature of the company's business, solar modules, is a cause for concern. Businesses dealing in the manufacture of solar panels and the like often find themselves consistently sacrificing pricing power for market share. This has clearly been the case with Canadian Solar, which has been unable to expand its EBITDA margin over the past few years.

CSIQ EBITDA Margin (Annual) Chart

CSIQ EBITDA Margin (Annual) data by YCharts.

And while the company recognizes its energy storage business as an important driver of future growth, bears aren't blindly accepting the idea that this will be the boon to the company's business that management is characterizing it to be. The company's skeptics will want to see whether the energy storage business in fact contributes to greater profitability, or if it reflects a similar dynamic with pricing pressure that the solar module business faces.

Putting the price tags into perspective

Having taken a look at the bull and bear cases for the stocks, let's see how they are currently valued. For Plug Power, which is unprofitable and doesn't generate positive operating cash flow, the traditional valuation metrics are unhelpful. Instead, we can assess the stock in terms of sales, and in doing so we find that it trades at a multiple of 9.4 -- well above its five-year average ratio of 3.6, and considerable higher than the S&P 500 P/S ratio of 2.3.

Canadian Solar, on the other hand, currently represents a bargain. Shares are trading at 2.3 times operating cash flow, which is a discount to its five-year average multiple of 4.1. 

What's an investor interested in clean energy to do?

Although enthusiasm for the hydrogen economy is growing, and management has a rosy picture of where the company will be in the next few years, Plug Power seems to be too richly valued at this point. Investors familiar with the company know that management has overpromised and underdelivered on more than one occasion; therefore, it will take some concrete improvements in the company's finances before investors should be sold on management's outlook.

With its long track record of profitability, conversely, Canadian Solar is trading at a compelling valuation and offers renewable energy investors a better proposition than Plug Power.

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Scott Levine has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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