FSLR vs. SCTY Stock – Who Is King of the Solar Stocks?

by Aaron Levitt | March 5, 2014 6:00 am

FSLR vs. SCTY Stock – Who Is King of the Solar Stocks?

After what seemed like 5 years of being in the dark, the sun finally shined[1] for solar stocks in 2013. Last year was one of the best 12-month periods for various makers and installers of photovalic panels in terms of shareholder returns. Overall, the broad benchmark for the solar sector — the Guggenheim Solar (TAN[2]) — finished the year with a nearly 120% gain.

solar panels 630 150x150 FSLR vs. SCTY Stock   Who Is King of the Solar Stocks?
Source: Flickr[3]

And two of the brightest in the index exchange-traded fund were First Solar (FSLR[4]) and SolarCity (SCTY[5]).

Both FSLR stock and SCTY stock had impressive returns in 2013, and with the new year well underway, more gains could be in store for the duo of solar stocks. The question is which is the best solar stock to buy today — FSLR stock or SCTY stock? Both take vastly different approaches to making profits in the solar industry and come with a different set of risks.

With that in mind, let’s take a look at what each of these photovalic superstars[6] has to offer — and see whether FSLR or SCTY stock steals the crown for solar stocks.

FSLR Stock — The Key For First Solar Is Utilities

For thin-film pioneer First Solar, the tale of the tape isn’t just about manufacturing cadmium telluride panels anymore. Sensing and reacting to the glut of cheap PV panels flooding the market from China, FSLR shifted focus to being an “all-around” solar provider. It’s now a completely vertically integrated business that not only manufactures solar modules, but constructs large-scale downstream projects for utilities and businesses.

That newfound shift in focus is what has helped FSLR stock produce some hefty gains since the depths of the Great Recession. Currently, First Solar’s utility scale systems business accounts for more than 85% of the company’s total revenues. Increasing sales to firms like Pacific Gas and Electric Company (PCG[7]) has driven the financial performance of FSLR stock throughout 2013.

Unfortunately, this reliance of utility systems can also be a major headache as well.

During its latest earnings release, FSLR stock reported disappointing results.[8] The key was that quarterly revenues were down by 29% on a year-over-year basis to just $768 million. U.S. utilities have significantly slowed the rate at which they’re signing new contracts. This is especially evident in the 200 megawatt-plus sized plants.

But with international utility-scale power plant plans on the docket, FSLR stock should be able to recapture much of its mojo over the longer term. First Solar is expanding into hot beds of solar activity like Japan and China. Ultimately, that should help restore the revenues in its systems business and return FSLR stock to real profitability.

As for SCTY stock…

SCTY Stock — SolarCity Is All About The Consumer

Unlike FSLR and most other solar stocks, SolarCity doesn’t focus on the grid-scale space, but on the consumer. SCTY doesn’t actually make panels or wafers, but it installs such products for residential and small commercial clients. It then makes money by leasing these installations to the homeowners and businesses for a monthly fee.

That focus on installation has kept SCTY stock on a torrid run. Overall, SolarCity managed to more than double[9] the number of installed panels during the last quarter to reach a record 103 megawatts. That brings the total number of contracts on SolarCity’s books to nearly 80,000. Forward guidance shows that SolarCity expects to install around 82 MW of panels for the current quarter and around 525 MW for all of 2014.

However, the actual financial impact of these increased bookings and contracts for SCTY stock isn’t known just yet.

The problem for SCTY stock is that it’s actually more like a bank rather than a traditional homebuilder or contractor. Unlike other solar stocks, SCTY uses a variety of asset-backed securities, debt and tax credits/subsidies in order to create leases for homeowners and business and thus generate its income and profits. Some analysts have called this solar stock a “black-box” of accounting[10].

This fact has recently come to a head as SCTY stock has been forced to delay its earnings report (twice) for the current quarter as it tries to allocate its costs from a few recent acquisitions under GAAP rules. Accounting issues are never good for a firm, and this highlights some of the potential “black-box” issues at SCTY.

However, the market doesn’t seem to care, SCTY stock has rallied[11] on both delay announcements.

FSLR vs. SCTY Stock: Best of the Solar Stocks

For investors looking at the duo of solar stocks the decision comes down to what you’re actually looking for — a trade or an investment.

FSLR stock may have the upper hand as a better long-term investment. By focusing on utility scale installations across the globe, it’s more of a stable solar-power play. After all, a major utility company generally doesn’t fork over hundreds of millions of dollars without making sure a project’s cash flows will be adequate over several years. That fact makes FSLR stock a great long-term investment in the space.

On the other hand, SCTY stock is about the trade. Currently, the market for personal solar installations in places like California are pretty lucrative. But as we’ve seen, subsidies can make or break renewable energy. Given its budget problems, California could very well cut these tax breaks for homeowners. Likewise, another housing bust could seriously impact SolarCity in its core markets. In the meantime, SCTY stock continues to rally unabated — despite zero profits and accounting issues. That reeks of momentum rather than underlying fundamentals.

The bottom line: For investors interested in solar stocks, FSLR stock offers a more stable approach, while SCTY is strictly a trade.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. sun finally shined: http://investorplace.com/2013/12/solar-stocks-fslr-jks-scty-csiq/?sid=YH8689&cp=IPIE&ct=20131216&cc=eletter&en=4466388
  2. TAN: http://studio-5.financialcontent.com/investplace/quote?Symbol=TAN
  3. Flickr: http://www.flickr.com/photos/etheltheaardvark/
  4. FSLR: http://studio-5.financialcontent.com/investplace/quote?Symbol=FSLR
  5. SCTY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SCTY
  6. photovalic superstars: http://investorplace.com/2014/02/ge-stock-general-electric/
  7. PCG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PCG
  8. disappointing results.: http://www.bloomberg.com/news/2014-02-26/first-solar-profit-slumps-as-power-plant-revenue-declines.html?cmpid=yhoo
  9. more than double: http://www.bloomberg.com/news/2014-02-24/solarcity-doubles-installations-delays-full-earnings-report-1-.html?cmpid=yhoo
  10. “black-box” of accounting: http://investorplace.com/2013/12/scty-stock-solarcity-solar-stocks-tsla/
  11. has rallied: http://www.marketwatch.com/story/solarcity-gains-despite-accounting-error-2014-03-04?siteid=yhoof2

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