Better Buy: Plug Power vs. TerraForm Power
While Plug Power (NASDAQ: PLUG) and TerraForm Power (NASDAQ: TERP) both focus on the renewable-energy market, they couldn't be more different. Plug focuses on providing hydrogen and fuel cell systems to help power electric industrial vehicles, while TerraForm generates electricity from the wind and sun. Plug Power also pours all its earnings back into developing new products, while TerraForm returns most of its cash flow to its investors with a high-yielding dividend.
Both companies, however, appear to have a bright future, as each sees lots of growth ahead. Here's a closer look at the bull and bear case for buying these renewable-energy stocks.
The bull and bear case for Plug Power
Plug Power recently rolled out a new five-year plan. The hydrogen engine and fueling solutions company believes it can generate $1 billion in revenue by 2024, along with $200 million in adjusted EBITDA and $170 million of operating income. That's a bold target for a company that currently only expects to generate between $235 million and $245 million of sales this year, while barely producing positive adjusted EBITDA along with an operating loss. Driving the company's optimistic view is its expectation that it can sell 25,000 units by 2024 in its core materials handling market, which should generate $750 million in revenue. In addition to that, the company believes that sales to the on-road vehicle market could reach $200 million, while revenue from stationary applications could hit $50 million by that year.
The company recently secured its first commercial-scale development of fuel cells for on-road applications, which gives it more confidence in its long-term outlook. That's because it increases the company's total addressable market opportunity by threefold to more than $100 billion.
While Plug Power believes that it can capture a slice of the much larger on-road market in the coming years, it's hydrogen-based technology has taken a back seat to lithium-based batteries over the years. As the cost of those batteries continues to decline, it will make them even more competitive versus hydrogen-based systems for applications like electric vehicles and energy storage. In the view of some, lithium-based battery storage will be so affordable in a few years that renewable energy companies will be able to add them to wind and solar facilities and still produce cheaper power than fossil fuel-based systems. If that happens, it would significantly cut into Plug's addressable market opportunity.
The bull and bear case for TerraForm Power
TerraForm Power, meanwhile, has a slightly less ambitious long-term plan, which it unveiled last year. The wind and solar power generator wants to grow its dividend -- which currently yields 4.8% -- by 5% to 8% per year through 2022. That forecast would enable the company to generate total annual returns in the low teens, assuming it continues to trade at around the same valuation multiple.
The company sees three factors powering that plan. First, it made a large-scale acquisition last year, which has significantly increased its cash flow per share. Second, the company plans to enhance the profitability of its legacy assets by reducing costs and improving their performance. Finally, it intends to use the cash flow it retains after paying its dividend to invest in expansion-related initiatives. For example, it's working to repower three of its existing wind farms by replacing the aging turbines with newer ones that can generate more electricity. Add in the fact that long-term contracts lock in the prices for nearly all the power it produces, and there's little risk that TerraForm won't deliver on its dividend growth forecast.
The company thus has plenty of upside potential beyond its base plan if it makes additional acquisitions. It recently did just that by acquiring a portfolio of solar projects in the U.S. that will boost its cash flow in the near-term.
About the only knock against TerraForm Power is its balance sheet, which currently has a sub-investment-grade rating. That weaker profile makes it more expensive for the company to borrow money. However, it has recently taken some critical steps to improve its financial profile. So it should have plenty of power to continue making deals if the right opportunities arise.
Verdict: TerraForm Power is the safer bet
If Plug Power can deliver on its bold growth plan, then the company's stock could have explosive upside in the coming years. However, given the edge that a competing technology has over its hydrogen-based systems, there's a high probability that the company could miss the mark. That could cause its stock to underperform.
TerraForm Power, on the other hand, has a fully powered growth plan, so there's little risk it will fall short of its target. Instead, there's ample opportunity for it to outperform, which could yield even more upside to its low-teen annual total return projection. That high probability of producing market-beating returns makes it the better buy in my book.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.