Renewable energy is the future, that much is clear. What is less clear, is when the world will be able to fully transition away from fossil fuels. If we are being realistic, we are decades away from this happening.

That makes investing in renewable energy companies a tricky proposition. The euphoria that followed the industry between November of 2020 and the start of 2021 has all but evaporated. The industry has dropped materially along with some Canadian stocks, and investors are possibly beginning to question their previous investments.

While valuations certainly were stretched, it is important to remember that investing in the renewable energy industry is a long-term game. In particular, those invested in the companies with a focus on hydrogen must have a long-term view.

Hydrogen and Canadian hydrogen stocks have been all over the news

Governments around the world are establishing lofty hydrogen strategies, viewing hydrogen as a key resource to play a big part in combating climate change. Even Canada has launched its own Hydrogen Strategy in December of last year.

As part of the strategy, Canada believes that hydrogen can account for 30% of domestic end-of-use energy by 2050.

Others which have announced hydrogen strategies include Japan, South Korea, Australia, New Zealand, Germany, France, Portugal, and the Netherlands, among others.

This is all well and good but the current reality is that hydrogen is far from becoming a viable commercial alternative to fossil fuels. There is much work to be done. From distribution and storage to transportation and consumption, the technology to adopt hydrogen is in its early stages.

We are still many years away from having a true end-to-end hydrogen supply chain

That is the bad news.

The good news? Investment in the technology is ramping up in a big way. As mentioned, governments have made it publicly known that they intend to invest in the hydrogen industry.

In Canada, the industry is estimated to create upwards of $50B in revenue per year and create 350,000 jobs by 2050. Internationally, demand is expected to reach $2.5 trillion by 2050.

There is no question, mass potential for the industry exists. As mentioned however, it will all come down to how the technology progresses.

Which brings me to how Canadian investors can take advantage of this global shift. Lets have a look at the top stocks in the sector.

The top Canadian hydrogen stocks to be looking at right now

Ballard Power (TSE:BLDP) - Fuel cell technology

At the heart of a viable shift to hydrogen is innovative fuel cell technology. In Canada, there are a couple of options for investors to consider.

The most well-known is Ballard Power (TSX:BLDP). The company is one of the leading hydrogen fuel cell companies. It has shipped over 850MW of (Polymer Electrolyte Membrane) PEM fuel cell products and counts many major auto manufacturers as strategic partners.

It is important to note that Ballard has a commercially viable product. However, as with any new technology the adoption has been slow as the company is focused in areas where fuel cell technology has a clear advantage. Today, that is in the heavy commercial space.

Thus far, it has powered 1,000 transit buses, 2,200 trucks, and has 4 trains, and 5 ship projects in development.

Ballard is largely considered one of the world’s best fuel cell companies with leading technology and proven use cases. Unfortunately, the stock has been anything but a leader. In the early 2000s, the company’s share price soared before crashing down to earth and effectively did nothing for a decade.

As interest in the hydrogen industry reached a fever pitch, Ballard’s share price soared to multi-year highs in early 2021. Then the bottom fell out and its share price lost ~60% of its value in the first half of 2021.

The loss in value is not all that surprising. Ballard was trading at extreme valuations and was benefiting from the market euphoria. We advised Stocktrades Premium members a few times to be cautious with Ballard. While the underlying technology is sound, the stock price got way ahead of itself.

Even at today’s prices, investors should exercise caution. We are still very much in the early days of the industry and at ~50 times sales, Ballard isn’t exactly cheap.

The company is not expected to become profitable for some time and analysts are expecting annual revenue growth in the 50% range through 2023. While this is a healthy growth rate, Ballard has a mixed history of meeting estimates.

Loop Energy (TSE:LPEN) - A new industry player

Shifting gears from one of the most widely known, to likely one of the least known. Loop Energy (TSX:LPEN) is a newly listed company having only gone public on February 25, 2021. Loop designs PEM fuel cell systems targeted for the electrification of commercial vehicles.

The demand for its IPO was quite strong and it priced at the top end of expectations - $16.00 per share and it touched a high of $17.44 on its first day of trading. Fortunately for management, the IPO’s was at peak investor demand for hydrogen stocks. Unfortunately for investors, those who bought in the early stages of its listing are likely sitting on big losses.

Since its IPO, Loop Energy’s stock price has cratered and it has lost ~56% of its value.

While the downtrend is unnerving, it is a result of negative industry sentiment. This has nothing to do with the company‘s performance or its products. In fact, we quite liked the company when it launched its IPO as it was much more attractively valued than the competition. As mentioned however, the markets soured on the industry and valuations cratered across the board.

Much like Ballard, it is focused first and foremost on commercial applications including light commercial vehicles, transit buses, medium and heavy duty trucks, marine, train, mining trucks, material handling vehicles, and stationary power.

Unlike Ballard, Loop Energy is a pre-revenue stage company. It has only begun marketing its products and expects to exit 2022 with $13.9M in sales – up from only $353K in 2020. It believes it can achieve long-term CAGR of approximately 40% through 2030. That is an impressive growth trajectory.

Whether it can achieve this level of growth remains to be seen and as a newly listed company, management has not yet demonstrated its ability to execute. The good news is that the company is successfully growing the backlog.

In 2020, Loop exited the year with a $3.2M backlog. When it went public, that backlog increased to $16.4M and as of last update (April, 2021), the backlog stood at $37.6M. Of note, the company’s backlog refers to projected sales over the next 24 months.

Analysts seem to be on board and are calling for 200%+ average revenue growth through 2023. Assuming the company hits revenue estimates, Loop is only trading at ~4 times Fiscal 2022 sales. In comparison, Ballard is trading at ~37 times Fiscal 2022 sales. Much like it was at IPO, there is no question that Loop Energy is cheap by comparison.

What makes Loop particularly attractive is that it is backed by Cummins, a $34B global industrial giant. This strategic partnership will enable Loop easier entry into a multitude of markets.

While the potential looks attractive, Loop Energy is likely to be even more volatile than Ballard. It is a newly listed company and Loop will be under greater scrutiny than its more established competitor.

Well executed business by the company and Loop looks like a bargain at these prices. On the flip side, if it struggles to meet expectations then investors are likely going to require considerable patience.

Overall, these are 2 strong Canadian hydrogen stocks to add to your radar today

Bottom line, both Ballard and Loop Energy are well positioned to be leading fuel cell companies but in the short term, their fortunes are likely going to be tied to market sentiment. Long-term, their success will be dependent on further innovations and the wide-spread adoption of hydrogen as an alternative source of energy.