In the world of solar energy, Canadian Solar Inc. (NASDAQ: CSIQ) and SunPower Corporation (NASDAQ: SPWR) are two of the biggest players. Canadian solar is one of the largest manufacturers in the world and SunPower is the industry's efficiency leader.
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But in the solar industry, the strategy that won yesterday can be doomed today. And both companies are going to have to adapt to the market's realities in 2017. Here's a look at what stock I think is better right now.
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Where the money comes from
Canadian Solar and SunPower both make silicon based solar panels, but that's really where the similarities end. Canadian Solar is a commodity solar manufacturer that differentiates itself from competitors with sheer scale. The company said it would have 5.8 GW of module capacity online at the end of 2016, compared to global installations of around 76 GW.
This can be an advantage when the market is undersupplied, but it becomes a weakness when the market is oversupplied, like now. Panel prices plunged by over one-third in 2016 to under $0.40 per watt, which should lead to weaker margins when fourth-quarter results are released. And the company's operations are really tied to the market overall.
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SunPower is a high efficiency panel manufacturer, which has been a point of strength and weakness in the past. Recently, the market has started to put more value on efficiency in the residential and commercial market, which has led to strong margins even as panel prices collapsed. But SunPower's business was really dominated by large utility scale projects, which benefit from low prices more than high efficiency. Hence the strategy shift to a "commodity-plus" panel called P-Series.
Both companies are impacted by macro trends in solar panel prices, but Canadian Solar is going to feel the ups and downs more because of its position as a commodity supplier.
Where the solar market is going
A couple of trends emerged in the solar industry over the past year that will impact both companies. Higher efficiency is gaining traction, not only in the residential market, but also with commodity suppliers moving toward higher efficiency mono-silicon or mono-PERC cells. Look for Canadian Solar to be a leader in this charge, which could potentially lead to higher margins than competitors. This plays into SunPower's high efficiency X-Series panels, but actually hurts their E-Series panels, hence recently shutting down a large manufacturing plant.
The second trend is that solar companies are developing fewer of their own projects. For a few years, solar companies have been moving toward self development, a movement SunPower led and Canadian Solar joined in a big way when it bought Recurrent Energy, but the tides have changed. Yieldcos turned into high yield vehicles that made dropdowns difficult and sales of equipment to developers like utilities now make more sense.
SunPower has a lead in the supply business considering it has the Oasis solution for utility scale solar projects. It will do everything from site design to construction, but doesn't have to own the project. Canadian Solar hasn't moved that far down the supply chain and is more focused on module supply agreements.
The best stock today
If the solar industry has a good year, both stocks will do well. But SunPower's strategy is more diverse and has greater differentiation, particularly in the residential and commercial markets. I'm afraid of the commodity market Canadian Solar is a part of because it changes quickly and history tells us that the largest commodity solar supplier will have a hard road ahead (a la Q-Cells, Suntech Power, and Yingli).
With that said, both companies are reliant on increased solar demand in 2018 and beyond, which could help all solar companies. They're both hoping for a brighter future, but SunPower has the edge.
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