The solar industry has a lot of long-term potential for value creation, but it's also a high risk industry for investors, with many companies going bankrupt over the past five years.
Two of the companies that have seen more than experienced ups and downs of the solar industry are TerraForm Global Inc (NASDAQ: GLBL) and Trina Solar Limited (NYSE: TSL). Today they present very different opportunities and risks for investors.
Two ends of the solar spectrum
The first thing to note is the business model difference between TerraForm Global and Trina Solar. TerraForm Global is a yieldco that owns projects long-term and intends to pay the cash flow from those projects to investors in the form of a dividend. Originally, this structure was intended to be a low risk way to play the industry, although it hasn't really turned out that way (which I'll cover below).
Trina Solar is first and foremost a solar panel manufacturer. It makes most of its money selling solar panels, and with 5.6 GW of capacity it's one of the largest manufacturers in the world. The company is also moving into project development, with 967.3 MW of projects connected to the grid, primarily in China.
While the simple explanation is that TerraForm Global is a safe yieldco and Trina Solar is a risky manufacturer, there's more to these companies than meets the eye.
TerraForm Global isn't as safe as it appears
When TerraForm Global was created by SunEdison, it was supposed to be a vehicle to buy solar projects internationally at a low cost of capital. That thesis didn't last long, though: the stock dropped, the dividend yield rose, and TerraForm Global could no longer buy projects from SunEdison at all.
TerraForm Global also bought 425 MW of projects from SunEdison for $231 million that were never completed, resulting in a lawsuit against its parent. And to make matters worse, SunEdison's bankruptcy could lead to the yieldco defaulting on project loans, and even the loss of power purchase agreement contracts to sell energy.
TerraForm Global was supposed to be a safe solar stock, but the reality has been anything but safe. The company could potentially be dragged into bankruptcy because of SunEdison's bankruptcy, and with no financial reports since Q3 2015, investors don't even know where the company's operations stand.
The solar panel business isn't much better
As bad as TerraForm Global has it right now, Trina Solar doesn't have it much easier. The company is in a highly competitive solar panel market without much differentiation for its products, meaning it has to compete on price, and it has $3.1 billion in debt and payables.
The result is a low gross profit margin of 17.1% last quarter and a net profit margin of just 3.3%. And remember, that's with a massive debt load to pay down as well.
What Trina Solar has working to its advantage is the opportunity to grow and improve its strategic position in the future. The company has been moving into the systems business, which has worked for competitors to create captive demand for panels and increase margins. But the bigger move might be the work to increase solar panel efficiency. The company recently announced that it's made 20.16% efficient multi-crystalline cells on production equipment, which could take it another step toward differentiating itself from competitors.
TerraForm Global or Trina Solar
Given the risk that TerraForm Global could go into bankruptcy, I think Trina Solar is the better option for investors between the two. The company isn't without risks, but it's one of the biggest solar manufacturers in the world, and is improving its technology, which could help it beef up margins in the future. And that upside potential is better than the risk associated with a failing yieldco.