According to a Grand View Research report, the total addressable market for clean energy is forecast to touch US$3.8 trillion by 2030, up from US$1.1 trillion in 2022, indicating a compound growth rate of almost 17%. The worldwide shift towards clean energy solutions and the expanding addressable market make stocks such as Canadian Solar (NASDAQ:CSIQ) and Brookfield Renewable (TSX:BEP.UN) top investment choices right now.
Let’s see which clean energy stock is a better buy right now.
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Is Canadian Solar stock undervalued?
Canadian Solar manufactures solar photovoltaic modules, solar energy and battery storage solutions, and the development of utility-scale solar and battery storage products. Candian Solar’s market cap is $892 million, and the stock trades almost 80% below all-time highs.
Canadian Solar stock slipped earlier this month after it reported revenue of US$1.64 billion and net income of US$3.8 million in the second quarter (Q2) of 2024, down from US$2.36 billion and US$170 million, respectively, in the year-ago period.
While Canadian Solar beat consensus revenue estimates in Q2, it fell short of earnings estimates, which was forecast at US$0.20 per share.
Yan Zhuang, president of Canadian Solar’s CSI Solar subsidiary, said, “Despite challenging market dynamics, CSI Solar achieved strong results in the first half. Amidst fierce industry competition, we maintained our focus on profitability while also increasing volume this quarter.”
Canadian Solar attributed its decline in sales to falling average selling prices of solar modules, which were offset by higher sales of battery energy storage solutions. Its gross margin also narrowed from 18.6% to 17.2% in the last 12 months due to lower margin contributions from solar power and battery energy storage asset sales.
An increase in project assets and accounts receivable meant Canadian Solar’s operating cash outflow stood at US$429 million, higher than the year-ago outflow of US$290 million. With US$4.2 billion in debt, it is evident that Canadian Solar is not generating enough cash flow to service interest payments or allocate funds toward organic growth.
The company’s Recurrent Energy business is raising US$500 million from BlackRock, one of the largest investment management companies globally. The investment will help Recurrent Energy grow its project development pipeline, creating a diversified portfolio that should translate into stable revenue and cash flows.
Analysts tracking CSIQ stock expect it to gain over 75% in the next 12 months, as Canadian Solar should benefit from improving profit margins and revenue growth.
The bull case for Brookfield Renewable stock
Brookfield Renewable also trades close to 50% from record levels, increasing its dividend yield to almost 6%. Among the largest clean energy companies in Canada, Brookfield Renewable owns and operates a diversified portfolio of hydro, solar, and wind energy assets.
The power it generates is sold to large corporate buyers and utilities under long-term PPAs, or power purchase agreements. Moreover, 70% of its income is tied to inflation, which allows Brookfield to generate stable cash flow even amid macro headwinds.
Brookfield Renewable generates enough cash flow to support its high dividend yield. In the last six months, its payout ratio was less than 75%, enabling Brookfield to retain cash and fund new investments.
Brookfield expects to grow its FFO (funds from operations) by over 10% annually through 2028 due to inflation-linked rate hikes, margin enhancement, acquisitions, and development projects. In the last 13 years, Brookfield Renewable has raised its dividends by at least 5% annually and expects the payout to grow between 5% and 9% each year going forward.
The Foolish takeaway
Brookfield’s expanding cash flow and tasty dividend yield make it a top stock to own in 2024 right now. Alternatively, Canadian Solar’s cheap valuation is difficult to ignore, especially if it can shore up profit margins in the next 12 months.
Canadian investors can consider gaining exposure to both clean energy companies. For instance, if you have $1,000 to invest, you may allocate $800 towards Brookfield Renewable and the rest to Canadian Solar.
