For well over a decade, SunPower (SPWR +0.00%) has been one of the most well-known companies in the solar industry. The thesis certainly sounds great: It began as a company with some of the most advanced solar panels on the market and had the backing of a deep-pocketed investor.
If you're looking for a solar stock to buy now, though, you may be better off looking at SolarEdge Technologies (SEDG +8.73%). Despite it being a younger, less-known company, there are many reasons it's a better investment in the solar industry today.
Image source: Getty Images.
Better execution
One frustrating thing about SunPower for investors is that the company's business strategy seems to be changing all the time. Despite its clear technology advantage, the way it has chosen to monetize that technology has changed multiple times -- with middling results.
In its 2012 annual report, the company's primary strategy was to develop and sell utility-scale facilities. Then, it tried to monetize those utility-scale developments in a different way by creating a yieldco. When the economics for that didn't pan out, SunPower exited that business and pivoted to marketing its high-efficiency panels to residential and commercial customers. When it was still losing some business to commodity panels, it started manufacturing commodity panels in a unique way to get better efficiency.
That business hasn't quite panned out as planned, either, and now SunPower is splitting into two businesses. The legacy SunPower will focus on residential and commercial development, while the panel production part of the business will spin off into Maxeon Technologies. SunPower has provided some impressive projections for growth and margins after the split, but whether it can meet those projections is yet to be seen.
SolarEdge, on the other hand hasn't been around nearly as much, so it hasn't had to adapt to as many changes in the industry. That said, the company has been able to monetize its product -- an inverter used to transform DC power from a panel to AC power used in outlets -- with much better results. Over the past six years, the company has gone from the world's 10th largest inverter supplier to the largest, with 52% of U.S. residential solar installations using a SolarEdge product.
Its success with inverters has allowed SolarEdge to venture into other parts of residential and commercial solar power systems. The company is now offering energy storage and energy management services, and it's expanding these offerings to commercial and utility-scale customers.
Perhaps SolarEdge had the benefit of coming into the market later than SunPower and being able to jump right in rather than having to evolve with the quickly changing markets. That said, SolarEdge found a strategy and a product it can profitably monetize, and it quickly carved out a majority of the market.
Still, as these two companies start to compete head-to-head with energy storage and management products, it wouldn't be surprising if SolarEdge is able to execute better.
Better financials
With better execution and the ability to monetize its offerings, SolarEdge has had much healthier financial statements as a result.
For years, SunPower built a solar panel that had better efficiency ratings than any other commercially available product on the market. But despite its product advantage over other panel makers, the company could never quite translate that competitive advantage into a business that could generate free cash flow. Instead, it has had to consistently rely on debt and equity raises as well as asset sales to cover its cash needs.
SPWR Free Cash Flow (Annual) data by YCharts.
SolarEdge's financials, on the other hand, look much more attractive. The company has been generating free cash flow ever since it went public. That has allowed the company to build up a negative net debt position, which means there is more cash on the books than debt outstanding.
SEDG Free Cash Flow (Annual) data by YCharts.
Despite the astronomical growth of solar power globally, the industry is highly cyclical and goes through rapid phases of over and undersupply. In cyclical industries like this, having the cash on hand to weather a storm or to have the financial firepower to make an acquisition when valuations are low gives SolarEdge a lot more optionality.
Better stock
Between a management team that has executed its business plan better and a healthier-looking balance sheet, SolarEdge's business looks like a better investment. The market has clearly seen this as well and has rewarded SolarEdge's stock accordingly.
SunPower is about to undergo a major corporate transformation, so the jury is still out as to whether this change will be the thing that finally gets this stock going. Based on management's history of execution, though, investors are probably better off sticking with SolarEdge Technologies.
