Repeatedly in the headlines this summer, EV stocks are arguably the most popular niche in the renewable energy industry. But investors who are attracted to the clean energy industry should recognize that there are many options to consider beyond Tesla, Nikolaand his companions.
For example, the fuel cell and solar industries also represent valuable options for those who want to boost their portfolios with green investments. So let’s consider two of the most recognized companies in their respective fields: Plug (NASDAQ: PLUG), a leader in fuel cell solutions, and Canadian Solar (NASDAQ: CSIQ), an unconditional in the manufacture of solar panels.
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The bulls run with the idea that …
Over 180% soared so far this year, Plug Power’s shares soared in 2020, extending the 149% increase they experienced in 2019. Why? Mainly, investors are increasingly confident that the company is on track to meet management’s projection for 2024 of generating sales of $ 1.2 billion, operating income of $ 170 million and adjusted EBITDA of $ 200 million.
Strengthening 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. In addition, it recently revealed its plan to diversify its business and enter the stationary power market on a large scale.
Unlike its bankrupt peers, Sungevity, Solyndra, and SolarWorld, Canadian Solar has thrived in the past two decades, and investors are confident that many sunny days remain. In 2020, for example, Canadian Solar forecasts shipments of 11,000 megawatt (MW) solar modules. If the company achieves this guide, it will represent a compound annual growth rate of 34% since 2010, when it shipped 803 MW.
Supporters of the company will also target Canadian Solar’s burgeoning energy business, which deals with the development of solar energy projects. Currently, it has 1 gigawatt-peak (GWp) in operation, with 3.7 GWp in portfolio and 12 GWp in pipeline. Additionally, Canadian Solar’s focus on the energy storage market is also a source of excitement as the company has 2,820 megawatt-hours of pipeline storage projects.
But bears believe it is better to be cautious because …
For those pessimists about Plug Power, the company’s finances make them feel more enervated than encouraged by the future. While the company has a track record of growing from its top line, it has simultaneously failed to generate profit and cash flow.
PLUG YCharts (annual) income data.
While the bears may be impressed with some of the company’s recent accomplishments, they remain cautious about the company’s ability to translate these successes into real earnings. Furthermore, the company’s constant reliance on raising capital through the issuance of capital (the outstanding shares have increased from 13 million in 2010 to 237 million in 2019) suggests further dilution waiting for current shareholders.
For Canadian Solar skeptics, the very nature of the company’s business, solar modules, is cause for concern. Businesses that manufacture solar panels and the like often constantly sacrifice pricing power for market share. This has clearly been the case for Canadian Solar, which has not been able to expand its EBITDA margin in recent years.
CSIQ EBITDA Margin (Annual) YCharts data.
And while the company recognizes its energy storage business as a major driver of future growth, the bears do not blindly accept the idea that this will be a boon to the company business that characterizes it. Skeptics at the company will want to see if the energy storage business actually contributes to higher profitability, or if it reflects a similar dynamic with the price pressure facing the solar module business.
Putting price tags in perspective
After taking a look at the bull and bear cases for stocks, let’s see how they are currently valued. For Plug Power, which is not profitable and does not generate positive operating cash flow, traditional valuation metrics are not helpful. Instead, we can assess the stock in terms of sales, and in doing so, we find that it is trading at a multiple of 9.4, well above its five-year average ratio of 3.6, and considerably higher than the S&P 500 P / S ratio of 2.3.
Canadian Solar, on the other hand, currently represents a bargain. The shares are trading at 2.3 times the operating cash flow, which is a discount to their five-year average multiple of 4.1.
What should an investor interested in clean energy do?
Although enthusiasm for the hydrogen economy is growing, and management has an optimistic image of where the company will be in the coming years, Plug Power appears to be overpriced at the moment. Investors familiar with the company know that management has promised too much and underperformed on more than one occasion; therefore, some concrete improvements in the company’s finances will be needed before investors are sold according to management’s perspectives.
With its long track record of profitability, by contrast, Canadian Solar is trading at a compelling valuation and offers renewable energy investors a better proposition than Plug Power.
