Plug Power (NASDAQ:PLUG) and SolarCity (NASDAQ:SCTY) have been two of the hottest energy stocks of the last two years. The raw growth potential of these two companies is impressive; however, alternative energy is a sector fraught with snake oil salesmen peddling sky-high dreams but delivering mostly massive losses.

PLUG Chart

PLUG data by YCharts

This article will take a closer look at Plug Power and SolarCity, to first decide whether either might actually live up to its promised growth potential, and then explain why even this might not prevent long-term investors from losing money.

SolarCity: Brilliant future, terrible investment
Bloomberg estimates that rooftop solar will grow by 20% annually through 2020 and that Solar will make up 18% of energy generation by 2030.

SolarCity has a business model I love. It installs a solar power system on a rooftop for free and signs a 20-year contract with the owner for power generation at a lower cost than the customer is currently paying. Both parties win, with SolarCity becoming a cheaper competitor to the local power utility.

SolarCity's growth has truly been spectacular and is likely to continue to be for many years. Consider this:

  • Solar panel installations have grown from 31 MW in 2010 to a projected 1,000 MW in 2015, representing 100% compound annual growth for five years.
  • SolarCity's market share of rooftop solar has grown from 12% in 2012 to an estimated 41.8% in 2014.
  • SolarCity now has $2.5 billion in contracted revenue, up from $700 million in Q2 2012 and representing a 66.4% compound annual growth rate.
  • SolarCity currently has 100,609 customers but is targeting 1 million by mid-2018, a 70% compound annual growth rate.
So how can I love SolarCity, yet say it's a terrible investment? Because there are three factors that will likely result in long-term losses for current investors: mounting costs, sky-high valuation, and high share dilution.

SCTY Shares Outstanding Chart

SCTY Shares Outstanding data by YCharts

These factors are why analysts are predicting negative earnings per share (EPS) growth until 2023 and why current SolarCity Investors are likely to underperform the market over the next 10 years. 
Between 2011 and 2013 SolarCity lost $318 million and through 2015 it's expected to lose $734 million more.
That loss is probably conservative because of SolarCity's recent acquisition of solar panel maker Silevo. SolarCity paid $200 million cash (leaving it with just $320 million)  for Silevo's 32 MW of capacity. 
The justification for the Silevo purchase was to offset the cost of high US tariffs on Chinese solar panels that SolarCity was purchasing. 
In the long term this goal will be accomplished because SolarCity is planning on expanding Silevo's capacity 33-fold to 1 GW within two years. By that time Silevo's panels are expected to be 24% efficient, resulting in a 25% reduction in panels needed per system.
However, SolarCity has said it will cost $500 million to expand this capacity and it will likely owe Silevo an additional $150 million for meeting certain production growth goals. A few years later SolarCity plans one or more additional factories to expand capacity to 10 GW, requiring billions of dollars more. 

SolarCity will require $1.1 billion in new capital within the next two years to pay for its ambitious expansion goals, and that means substantial shareholder dilution. Combine this dilution with SolarCity's price/sales ratio of 32 and the stock is poised to drop massively during the next market correction. I would advise interested investors to put SolarCity on a long-term watch list and buy after such a crash.

Plug Power: the shareholder dilution king

PLUG Shares Outstanding Chart

PLUG Shares Outstanding data by YCharts

As the above two charts show, over the last 13 years Plug Power's revenues have grown by 2.73% annually yet its share count has grown by 31%/year while long-term investors lost nearly all of their money. In the last 18 months the share count has nearly quadrupled. Shares have soared because Plug Power operates in a potential $4 billion market, fuel cell-powered fork lifts and delivery trucks, and sales are projected to soar 350% between 2013 and 2015.

However, in the first quarter Plug Power reported revenues of just $5.6 million, down 12.5% from 2013. Meanwhile losses for the quarter grew 783% from $8.6 million to $75.9 million. Plug Power has a long track record of failing to deliver on growth promises. For example:

  • In 2009 Plug Power guided for gross margins in the mid teens on mid $40 million to low $50 million in revenue.
  • In 2012 Plug Power guided for positive gross margins and $40 million in revenue.
  • Revenues have never exceeded $33 million, gross margins never higher than -25%, and today's gross margin is -41.4%.

Foolish takeaway
SolarCity is a fantastic solar company with a terrific business model that might one day make a great investment . However, for now the only thing more impressive than its growth is its ballooning costs, which are accelerating. This means massive shareholder dilution is likely for years to come and at these valuations, SolarCity investors are at severe risk of losing money over the next decade. Meanwhile, Plug Power is a perfect example of a hype stock that never delivers on its promised growth potential and whose long-term shareholders have only obscene dilution and losses to show for their patience.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Compare Brokers