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Better Buy: Plug Power vs. Canadian Solar

Hardly any sectors of the stock market have brought joy to investors in recent weeks, but the renewable energy industry has been particularly grim. The NASDAQ Clean Edge Green Energy Index dropped 23.4% in March, compared to a 12.5% decline in the S&P 500.

That's been bad news for solar companies like Canadian Solar (NASDAQ: CSIQ) and hydrogen fuel cell companies like Plug Power (NASDAQ: PLUG). Both saw shares plunge by about 20% last month. But that could be a chance to buy in. Let's dig a little deeper to see which of these underperforming renewable stocks looks like the better buy.

Image source: Getty Images.

Cheap fuel beats renewable fuel

On March 9, talks among OPEC+ nations broke down, with Russia and Saudi Arabia each vowing to ramp up production in April, flooding the global oil market with cheap crude. Other countries followed suit, and oil prices collapsed. Benchmark Brent crude prices were cut almost in half, from over $50 per barrel at the beginning of March to just over $25 per barrel at the end of the month.

When oil prices drop, renewable fuel stocks also tend to suffer. After all, why would someone -- say, a business with a truck fleet -- pay the high up-front costs to switch to renewable fuels when they could just buy cheap gas?

That's the question investors may be asking about Plug Power. The bulk of the company's revenue right now comes from selling hydrogen fuel cell-powered forklifts to warehouses. Its customers include retail heavyweights like Amazon (NASDAQ: AMZN) and Walmart. However, Plug really wants to break into the heavy-duty motile market by selling fuel cell-powered delivery vans.

There's no doubt that warehouses and delivery vans are seeing a surge in activity as homebound consumers opt to have items shipped to them, but with gasoline so cheap, it's unlikely that this will translate into a surge of orders for new fuel cell-powered delivery vans.

Big investments may have to wait

While Canadian Solar isn't in the fuel industry, the company's solar module sales may run into a different type of problem -- namely, the novel coronavirus pandemic.

Canadian Solar manufactures solar modules and inverters for residential, commercial, and utility-scale photovoltaic arrays. However, with the coronavirus pandemic crashing the global economy, governments are diverting resources to stemming the spread of the virus, investing in their healthcare infrastructure, and ensuring the economic well-being of their citizens. Even after the outbreak runs its course, it's unclear how many governments will have the appetite -- not to mention, the budget -- for expensive solar installations. The silver lining is that Canadian Solar currently has 3.7 gigawatts of backlogged projects that could help keep it busy while it waits for a turnaround.

Corporations reeling from the economic effects of the coronavirus, and homeowners whose livelihoods have been affected, are also unlikely to make big investments in solar, either. And while some of Canadian Solar's customers -- including Amazon -- may weather the pandemic with minimal aftereffects, that's certainly not going to be the norm.

Add to this the sunsetting of the U.S. Solar Investment Tax Credit -- which did not get renewed in the recent $2 trillion stimulus package, as some advocates were hoping -- and things look bleak in the near term for solar companies like Canadian Solar.

The better business

With both companies facing uncertain prospects in the short term, and the global economic downturn throwing a wrench into long-term projections for renewables of all types, we'll have to evaluate the fundamentals of these companies to see which is likelier to outperform.

Fortunately for us, there's really no comparison here. While Canadian Solar certainly has some drawbacks -- solar companies in general have underperformed since 2015 -- it has at least been consistently profitable for the last five years. While its debt load is a bit higher than I'd like, the company has paid down some of its debt since 2018 without meaningfully diluting its shares. It also generated $600 million in operating cash flow in 2019, up from just $216 million in 2018.

Plug Power, on the other hand: Oof! Despite revenue soaring by 238.2% over the last five years, the company has only had one single profitable quarter in the last 10 years, and that was back in 2015. It's only posted positive quarterly EBITDA three times during that period (one of which, admittedly, was last quarter). It's never posted positive operating cash flow on a trailing-12-month basis in its 20-year-plus history. What it has managed to do over the last five years is balloon its long-term debt from zero all the way up to $331.8 million and increase its share count by 50% to keep itself afloat.

'Nuff said.

And the winner is...

These are both troubled and risky companies that are facing uncertain near-term outlooks, and even some questions about their long-term viability. However, only one of them is profitable and cash flow positive, while the other is falling deeper into debt and diluting its shares to boot. Canadian Solar is the clear winner.

However, investors should be careful before buying either of these companies right now. With so many near-term concerns, the risks may outweigh any potential benefits of buying at depressed prices.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Bromels owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.


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