Canadian Solar Inc. (NASDAQ:CSIQ) and First Solar, Inc. (NASDAQ:FSLR) are two of the biggest solar manufacturers in the world, giving them an advantage in a market with trillions of dollars in potential. Despite the fact that they both serve the same market, they're very different companies. Canadian Solar makes silicon-based solar panels that are largely commoditized, but it has scale that beats most competitors, while First Solar is the only thin-film solar manufacturer to build scale profitably.
For investors wanting to dive into the solar industry, which stock is the better buy?
Balance sheets matter in solar
The first thing to compare between Canadian Solar and First Solar is their balance sheets. You can see below that Canadian Solar is holding $2.4 billion in debt on its balance sheet offset by just $787 million in cash. First Solar, on the other hand, has a net cash position of over $600 million.
A better balance sheet gives First Sola the flexibility to adapt to constantly changing market conditions. When there's margin to be made building projects, a better balance sheet allows for flexility to move into development. When demand is weak, a good balance sheet allows a company to upgrade equipment to prepare for a brighter future rather than try to churn out panels that may only cover cash costs.
On the balance sheet, First Solar has a very clear advantage over Canadian Solar.
A vast majority of the solar panels installed around the world today are essentially a commodity product. Multicrystalline cells from dozens of manufacturers are built with the same equipment and very little differentiates them, leading to a hypercompetitive market overall.
Canadian Solar has managed to build one of the largest manufacturing bases in the world with this commoditized technology, but the cost has been the massive debt load I highlighted above. First Solar, on the other hand, has always had a technology lead in one form or another over competitors, which has led to much better financial results. One way to measure how well a company can differentiate itself from competitors is by looking at gross margin. And you can see below that First Solar has always had a margin lead over Canadian Solar.
What's changed in the last six months is how both companies view future technology. First Solar decided to upgrade all of its manufacturing capacity, some 3 GW worth, to a new panel design that's aimed at increased efficiency and lower costs. The move is a big risk and relies on the hope that First Solar will be able to outperform competitors once the upgrade is complete.
Canadian Solar isn't sitting still, either. The company is investing in PERC technology, which aims to squeeze out a few more percentage points of efficiency out of each solar panel. PERC commands a higher price than commodity solar panels, and with the scale Canadian Solar has, it may be able to take a leading position in the high-efficiency market. That'll give it a little differentiation with an incremental investment rather than reinventing what it does like First Solar is doing. On the technology front, I would give Canadian Solar a slight advantage because it has less risk, but First Solar could outperform expectations as well.
The best buy today
Between these two stocks, I think First Solar is in the best long-term position. It's taking a risk in upgrading equipment to technology that's yet to be proven at scale, but it's a necessary move in today's solar environment.
And the balance sheet strength shouldn't go unnoticed. Here's another way to look at these companies: First Solar could buy Canadian Solar outright at the latter's market cap today and still have cash left over. That's a strong position to be in, no matter where the solar industry turns next.