The current administration may be unenthusiastic about the adoption of renewable energy, but plenty of local and state governments have espoused nontraditional energy sources. And the issue -- along with climate change -- remains at the forefront of political agendas for foreign nations.
With renewable energy continuing to draw from a wide range of politicians and businesses alike, savvy investors are looking for investment opportunities in alternative power. So let's look at two of the more popular options for renewable energy investment: Plug Power (PLUG 8.74%), a leader in fuel cell solutions, and Enphase Energy (ENPH 5.83%), a top supplier of solar microinverters, to see which provides the better opportunity at the moment.
Image source: Getty Images.
A brief background
Besides their focus on renewable energy, Plug Power and Enphase Energy have demonstrated commitments to expanding their horizons. Plug Power, for example, initially made hay in providing fuel-cell solutions to the material-handling equipment market like warehouse forklifts but is broadening its reach. Besides pursuit of the electric vehicle market, Plug Power gained exposure to aerospace through its recent acquisition of EnergyOr.
Similarly, Enphase has advanced beyond its core competency. While it maintains a leadership position in the manufacturing of solar microinverters, its recently developed home energy management system, Enphase Ensemble, provides customers with the ability to "enable new grid-independent solar use cases," which is management's way of saying a system that can power you house 24/7 without help from the electrical grid
From top to bottom...lines, that is
While Enphase Energy consistently reports more on the top line than Plug Power, a look at the growth rates for the two companies reveals comparable achievements. Over the past 10 years, for example, Plug Power and Enphase Energy have grown revenue at compound annual rates of 34.7% and 35.9%, respectively.
But Enphase appears to have had greater success at reaching profitability, illustrating how well it has executed a growth initiative that began in mid-2017. Besides generating higher margins from the upgrades in its microinverter offerings, Enphase has reduced costs by sourcing materials from several suppliers instead of the sole supplier it had in 2016, and by streamlining its logistics.
| Company |
5-Year Avg. Gross Profit (loss) |
5-Year. Avg. Gross Margin | 5-Year Avg. Operating Income | 5-Year Avg. Operating Margin | 5-Year Avg. EBITDA | 5-Year Avg. EBITDA Margin |
|---|---|---|---|---|---|---|
| Plug Power | ($1.3 million) | (2%) | ($63.9 million) | (58.5%) | ($66.5 million) | (67.6%) |
| Enphase Energy | $86 million | 26.1% | ($105.8 million) | (6.2%) | ($15.7) million | (5.1%) |
Data source: Morningstar. EBITDA = earnings before interest, taxes, depreciation, and amortization.
Achieving its target of 30%, Enphase has consistently expanded its quarterly gross margin from 13.3% in Q1 2017 to 34.1% in Q2 2019 thanks, in part, to upgrades in its microinverters. And while the company hasn't met its goal of a 10% operating margin, it has made steady progress -- far outpacing Plug Power. Forecasting positive adjusted EBITDA for 2019, Plug Power's management believes this will be a record-breaking year for the company in terms of profitability. Whether the company achieves its forecast, however, remains to be seen.
Winner: Enphase Energy
How clean are the bills of health?
With greater proximity to profitability, Enphase Energy appears to be more appealing than Plug Power. And its attractiveness grows even greater when considering the companies' cash flow statements.
ENPH Cash from Operations (Quarterly) data by YCharts.
While Enphase Energy's bottom line is colored red, the company has consistently demonstrated the ability to organically generate some cash -- something that should allay investors' concerns about the lack of profits. Plug Power, conversely, has failed to achieve the same success. This is particularly noteworthy considering the company's balance sheet. Because of its inability to grow cash through its operations, Plug Power has had to continually rely on both the issuance of debt and equity to keep the lights on, and it will remain this way, presumably, for the foreseeable future.
To further illustrate the more precarious position in which Plug Power finds itself, it's worth noting the capital structures of the two companies.
ENPH Debt To Capital (Quarterly) data by YCharts.
Plug Power's debt-to-capital ratio of 1.07 certainly raises a red flag, and it makes the company seem a lot less appealing when juxtaposed with Enphase Energy's debt-to-capital ratio of 0.47.
Winner: Enphase Energy
Asking about the asking prices
Because neither company generates profits, the traditional price-to-earnings metric is unhelpful in assessing the price tags of the two stocks; consequently, we can gain insight through the use of the price-to-sales ratios. Currently, Plug Power trades at 2.6 times trailing sales, representing a discount to its five-year average multiple of 4.4. Enphase Energy, on the other hand, appears to be richly valued at the moment as shares have skyrocketed following the company's strong 2019 earnings reports. The stock is currently valued at 8.6 times trailing sales, a notably higher valuation that its five-year average of 1.4.
Enphase Energy's stock may seem too richly priced at the moment considering its past valuations, but the risks surrounding Plug Power are too high to warrant picking up shares in the fuel-cell specialist simply because of the less expensive valuation.
Winner: neither
The power-packed takeaway
Both Plug Power and Enphase Energy represent industry leaders in their respective niches of the renewable energy industry, and it's impressive how each company continues to grow despite the headwinds that have toppled many of their green-energy peers. In terms of which is the more compelling opportunity for investment, though, Enphase Energy is the clear winner with its less debt-laden balance sheet and its ability to grow cash organically.
