Better Buy: Canadian Solar Inc. vs. SunPower

By Travis Hoium Markets Fool.com

Canadian Solar (NASDAQ: CSIQ) is one of the biggest solar manufacturers in the world and SunPower (NASDAQ: SPWR) makes the industry's most efficient solar panels. So it would make sense if their leadership positions in a booming industry had catapulted both of them to enjoy strong financials and large market caps.

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But that's not the case. Both Canadian Solar and SunPower are facing uncertain futures in highly competitive niches. Here's a look at how they stack up against each other.

Image source: Getty Images.

What it means to be a solar manufacturing leader

Canadian Solar has built its business on scale, and on the back of debt provided by China's state-run banks. As you can see below, it has added billions in debt over the last two years -- but in the process, it has boosted its manufacturing capacity, which set to reach 7.0 GW by the middle of this year.

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CSIQ Total Long Term Debt (Quarterly) data by YCharts

What Canadian Solar is building with that debt and capacity is a commodity solar panel, which is why you see the big decline in net income recently. The solar industry is oversupplied right now, and panel prices have plunged by about one-third over the past year, leaving little margin on each sale, and leading to weak financials, even for those with scale. Canadian Solar is no different than many of its large Chinese rivals in its financial weakness.

High efficiency hasn't fared much better

SunPower doesn't have as much debt as Canadian Solar, but its finances look worse. It's experiencing losses from shutting down some manufacturing capacity, and it's suffering from very low margins in its power plant business, which once drove the company's profitability.

SPWR Total Long Term Debt (Quarterly) data by YCharts

There is some strength in SunPower's residential and commercial business, where it benefits from having higher efficiency than competitors, but that's more than offset by the power plant weakness right now. But that could change in the next year.

Where Canadian Solar and SunPower are headed

On the surface, neither of these companies looks particularly strong. But when we look at their strategies for the future, I think the investment picture becomes clearer. Canadian Solar is currently doubling down on its development and solutions business, which includes residential solar kits with inverters, mounting cables, and other components. It's really a commodity supplier to the global solar industry.

SunPower is taking a more holistic approach, offering services from the time a developer begins evaluating a site to the project's completion. Its Oasis power plant platform includes a drone-based system to aid with site design and pre-engineered racking solutions. The Helix product for commercial applications and Equinox for residential systems also include software for bidding and pre-engineered racking and installation components. What really separates these products is that they're built for SunPower's higher-efficiency solar panels, squeezing more energy from every dollar spent on a solar installation.

Both Canadian Solar and SunPower face challenges, but in a highly competitive industry, I'll stick with SunPower because of its superior technology and more holistic approach to the component supply business. Long term, I think SunPower's strategy is better than betting on commodity solar components.

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Travis Hoium owns shares of SunPower. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.