There has been a lot of fuss recently about the Solyndra debacle. About a year ago, President Barack Obama toured the solar energy company and touted its photovoltaic systems as a perfect example of so-called “cleantech” growth that would create high-tech, high-paying jobs.
Unfortunately — and despite a $535 million loan guarantee from the Department of Energy — Solyndra filed for bankruptcy this month, terminating all 1,100 workers. To make matters worse, the FBI recently raided offices, and now Congressional hearings are revealing very sloppy spending in the wake of Uncle Sam’s endorsement.
We can debate the Solyndra failure as a talking point for the 2012 election another time. What investors really should be concerned with is the dark clouds gathering over the entire solar sector. Just take a look at the performance at some of the biggest names in the solar sector:
Evergreen Solar (PINK:ESLRQ) plummeted to about a dollar in late 2010 as it tried to restructure its debt. Now it trades for about a nickel — after a 1-for-6 split in January — and has been relegated to the pink sheets. That recent flop would be bad enough, but when you consider that shares traded for an adjusted price of $12 or so at this time in 2009, the losses look even uglier. Evergreen filed for bankruptcy in August to try and scrape together the $485 million it owes creditors and soon will disappear forever.
First Solar (NASDAQ:FSLR) is the “leader” among pure-play solar stocks in the U.S., with a market capitalization of almost $6 billion. FSLR stock is down 48% since Jan. 1, 2011. The leader by most measures in the industry, First Solar saw its profits slashed by more than half — from $159 million to $61 million – as Europe’s debt woes resulted in subsidies being slashed. Adding insult to injury, Axiom Capital’s Gordon Johnson slashed his price target for the stock from $75 to $35. That’s another 50% decline from here, and barely a tenth of First Solar’s peak share price of $317 in 2008.
Sunpower (NASDAQ:SPWRA) is next in line among the larger domestic solar players. Its stock has performed “better” than First Solar in 2011, down about 30% in 2011. However, since its peak valuation in 2007 over $130, the stock has flopped almost 95% to under $9 a share as of this writing. Why? Volatile revenue and profit performance makes for a risky bet — and the fact that SPWRA is cruising towards a third-straight quarterly loss has investors leery. What’s more, long-term debt of more than $500 million and total liabilities pushing $1 billion mean there’s not a lot of room for error considering the company’s $900 million market cap. There are serious hurdles to growth, considering the very expensive nature of solar panel manufacturing facilities on top of current debt loads.
Those are three specific stories of three well-known U.S. solar companies — proving Solyndra’s implosion didn’t take place in a vacuum.
No Subsidies, No Venture Capital
So what are the broader issues at play weighing on all players in the solar space?
For starters, China has been even more aggressive with its alternative energy investments. Massive subsidies to alternative energy companies in the People’s Republic have prompted growth and propped up struggling companies. The result has been a substantial drop in solar cell prices because Chinese manufacturers have the government to fall back on in their quest to drive prices lower and entice buyers.
American firms just can’t compete on this playing field. But lest you cry foul on China’s big government policies, Beijing is just playing a game we know very well in America. Farm subsidies, anyone?
The problem for solar is that America is focused on slashing government spending right now, not propping up cleantech businesses that need help in their early years, and Washington just can’t stomach a matching subsidy on solar right now.
Also, venture capitalists are not all that eager to invest in this troubled market — and when they do, VC firms plow their cash into social media and Internet names. The option between investing in Twitter or a solar startup is really not much of a choice.
China Hurting but Could Outshine U.S. in Long Run
While U.S. solar stocks are slammed by a lack of private money and government money, don’t think that China is booming. JA Solar Holdings Co., Ltd. (NASDAQ:JASO) and oddly named but Chinese-based Canadian Solar (NASDAQ:CSIQ) are both off more than 60% so far in 2011. Not exactly the cream rising to the top.
That’s largely because oil appears to be approaching a new low for 2011 at under $80 per barrel currently and moving toward levels not seen in since the recession-era lows of 2009 and 2010. With cheap oil, who needs solar? The race to the bottom in price because of government subsidies in China is only amplified by the lack of demand.
Perhaps Obama should have known better than to tout Solyndra as a shining example of cleantech job growth in America. The industry has been facing headwinds for a while, and things have gotten particularly hostile lately.
But one could argue that without such government backing, American solar panel manufacturers could continue their steady downward descent. Evidence indicates that would cede the solar market wholly to China, and while that market might not be very attractive right now, it could put us way behind as a nation if solar becomes relevant a decade down the road.
That’s a tough sell to both investors and federal spending hawks, though. Everyone seems to be much more concerned with the here and now than any prospect of solar stocks being an area of growth 10 years down the road.
It all adds up to a very cloudy forecast for solar.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Write him at [email protected], follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.