Like other renewable energy stocks, TPI Composites (NASDAQ:TPIC) had a great 2020. But it's been a rough ride so far in 2021. Although shares are now about even for the year, they were up over 45% at one point and were also down over 20% in early March.

Despite the volatility in its stock price, TPI has the makings of a long-term winner. Here's why the world's leading independent manufacturer of wind blades is my top energy stock to buy right now.

A construction worker gazes up at a row of wind turbines.

Image source: Getty Images. 

Business has been good, but could get even better

TPI generates the majority of its revenue from long-term supply agreements (LTSAs) with some of the world's largest original equipment manufacturers (OEMs) like Vestas, GE, and Siemens. These OEMs have been landing projects and expanding services over the last few years as renewable power generation costs have come down -- which has resulted in more business for TPI. However, it's really the projects that are planned and proposed over the next five to 10 years that are behind the push for more capacity.

Wind energy projects are expensive and take several years to complete, not to mention intense coordination between multiple supply chains. Therefore, the components manufacturers, as well as the operators, are cutting checks now for sales they won't see for years. This is worth keeping in mind when looking at TPI's spending patterns.

Making more blades

TPI has responded to the forecast for higher wind energy output by ramping up its manufacturing capacity, as well as constructing R&D facilities in China, Denmark, and Germany. The results speak for themselves.

Last year, TPI produced over 10,000 wind blades-- 50% more than three years ago -- for an average price of $160,000 to $165,000 per blade, . 

A bird's eye view of an offshore wind turbine.

Image source: Getty Images.

Today's blades are bigger, more expensive, and generate more energy than in years past. This is because project specs like those designed by the aforementioned OEMs are increasing in complexity and demanding higher output per turbine. For example, Vestas is now designing 10-megawatt (MW) wind turbines for massive utility-scale offshore wind farms. 

The increase in size per blade has helped TPI generate more revenue from its manufacturing lines. In just three years, it has nearly doubled the amount of energy capacity that can be generated by its annual blade production.

Metric

2020

2018

2016

Revenue

$1.67 billion

$1.03 billion

$769 million  

Sets*

3,544

2,423

2,154

Estimated megawatts**

12,080

6,560

4,920

Dedicated manufacturing lines***

53

55

44

Data source: TPI Composites. *Global annual production of blade sets. **Estimate of the amount of energy capacity that can be generated by all blades produced during the year. ***Manufacturing lines devoted to TPI's customers under LTSAs at the end of the year. 

The short-term downside of expansion

TPI's global capacity expansion is a catalyst for its long-term growth. But in the short term, it has taken a sledgehammer to its profitability and free cash flow (FCF). 

The renewable energy stock reported its second consecutive annual loss and third consecutive year of negative FCF as high capital expenditures (capex) offset its gains. Although down from 2019, TPI's 2020 capex was still more than double what it was five years ago. 

TPIC Revenue (Annual) Chart

TPIC Revenue (Annual) data by YCharts

Wall Street tends to embrace spending if it's paired with revenue growth (especially for growth stocks). But TPI is only guiding for an 8% revenue increase in 2021.  However, its capex is coming down, which should result in a small annual profit. The company notes that its "capital expenditures have primarily related to machinery and equipment at our new facilities and expansion and improvements at our existing facilities." Expansion is at a nice stopping point for now, so we should expect to see lower spending and higher profitability from TPI in the coming years. Its margins should improve too. TPI is guiding for a 6.8% adjusted EBITDA margin in 2021, which is better than last year's 5.7%. 

Reading between the lines

Coming off an unprofitable year with slowing revenue growth isn't a good look. Digging deeper, however, the big picture looks bright. TPI is still settling into its larger global footprint. For example, it recently started production out of its India facility after signing a multi-year deal with Nordex, a German OEM. It's also worth mentioning that the company's forecast factors in a $50 million to $60 million decrease in demand due to lower production volume, mainly out of China -- which is a fairly significant headwind. Should that narrative change, TPI could be in for a nice surprise. However, investors can take solace knowing that TPI's forecast already factors in lower demand.

TPI's lower spending is coming at a good time. Lower spending should increase FCF and offset some of the debt that was taken on during the pandemic. Rising interest rates will have less of an effect on TPI since it shouldn't need to take on more debt. However, higher interest rates could impact the profitability of the wind industry as a whole.

Clean energy is the future, but renewable energy stocks could continue selling off if interest rates continue to rise and growth slows. 2021 will be a "prove it" year for TPI to see if it can return to profitability and secure more long-term contracts for its newly added manufacturing facilities. TPI's reasonable valuation paired with its upside potential makes it arguably the best pure-play wind energy stock for investors who don't mind volatility.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.