Canadian Solar (NASDAQ:CSIQ) stock is up over 900% over the past two years, outpacing even the best and brightest in the solar industry. Does does the stock have room to run higher, or is it ready to fall?
There are certainly risks, but here are the three mains reasons to be excited about Canadian Solar stock right now.
Global solar installations are expected to grow 16%-25%, to 53 gigawatts to 57 gigawatts, in 2015 and Canadian Solar will be a major beneficiary. It expects to increase shipments from 3.2 GW in 2014 to 4.0 GW-4.3 GW this year.
Margins from selling solar panels are also likely to rise. Costs continue to come down slowly even as module sale prices rise slowly. According to GTM Research, module prices rose from $0.72 per watt in fourth-quarter 2013 to $0.73 per watt in fourth-quarter 2014. With more industry growth expected, prices could continue their deliberate increase in 2015.
Recurrent Energy makes this a project-building juggernaut
In February, Canadian Solar acquired project builder Recurrent Energy for $265 million, adding 1.0 GW in late-stage pipeline--an industry term for what the company is bidding on and expects a high win rate-- and 4.0 GW in total pipeline--all of the bids the company is working on.
Vertically integrating from making solar modules into building projects is the new business model in solar, giving companies more opportunities to generate value up and down the supply chain. As prices for solar panels have fallen in the last three years the value generation has shifted from solar panel makers to project builders. In the next three years, the industry could become supply constrained, shifting value back to module makers. Owning both sides of the business enables companies to choose whether to sell modules by themselves or to build projects because the economics are attractive. That's a good spot to be in.
A yieldco is coming
Another piece of adding value with the project business is retaining some of the project value over the long term. An increasing number of companies are doing so with a yieldco, a separate public company that owns projects with long-term power purchase contracts, generating cash flow and dividends for investors. Canadian Solar expects to launch its own yieldco late this year or early in 2016.
Once the yieldco is launched, it's all about finding valuable projects to include in the portfolio. That's where Canadian Solar and Recurrent Energy will prove their worth. It will take time to find out just how efficient the company is in building projects, but a low-cost supply of solar panels should offer an opportunity to create value by pushing projects down to the yieldco and extracting value through incentive distribution rights and a stake in the company..
Canadian Solar still poses risks
While there are things to like about Canadian Solar today, there are risks in the business as well, and I'm concerned about the lack of high-margin projects in Canada that have driven profits in the last two years. Considering the downside risk, I'm not bullish enough on Canadian Solar to jump on the stock today, but if these factors begin to add value to the core business in 2015 I'm open to changing that stance.