Ever since solar energy became popular, early in this decade, investors have been waiting for it to pay off, and so far it hasn’t.
And as time passes, investors are trading in their optimism to the detriment of industry leaders, such as First Solar, Inc. (NASDAQ:FSLR).
Back in 2008, FSLR stock sold for over $300/share. In 2011, it commanded more than $100/share. Today it’s trading around $48, and is down nearly 30% for the year.
This is probably a fair price, because the company’s $3.6 billion in sales in 2015 vary little from 2012’s $3.4 billion. Margins are continuing to improve in 2016, but sales are not. First-quarter revenue of $848 million compares with the previous quarter’s $942 million.
First Solar has been careful not to expand capacity too rapidly. It remains tied to the unique Cadmium-Telluride technology it started with, having never gone into silicon-based photovoltaics, still considered a more mainstream technology. Yet, it remains the industry’s unquestioned leader and the only company in the space I would consider worthy of investment.
So let’s talk about the bright side first.
Efficiency Is The Cheapest Renewable Energy
According to the Solar Energy Industry Association, solar is performing well for customers. More than 29 gigawatts are now installed in the United States, with upward of 200,000 people currently working in the industry. That’s more than in coal mining or oil and gas extraction. What’s more, the price of a solar panel is down to about 60 cents/watt, and utilities can install this capacity for less than $1.50/watt.
Companies building data centers, like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) love solar because it gives them visibility on their energy costs for a decade and more. But these key customers are finding that they have overestimated their own needs.
Google is putting DeepMind, an artificial intelligence service acquired in 2014, to work on the problem of minimizing its energy needs, which make up 40% of global internet demand. It believes it can cut these costs by 40%, which could make the $1.5 billion it has already invested in wind and solar projects nearly sufficient to meet its long-term needs.
This illustrates an important lesson for solar panel makers, and for energy companies more broadly. The cheapest form of renewable energy remains efficiency, and the U.S. has more of that available — due to our wasteful habits — than any other country.
Thus, there’s a continuing glut of solar panels, which means there is no profit in the space.
A Solar Panel Glut
This is a global problem, as Chinese producers like JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:JASO), Trina Solar Limited (ADR) (NYSE:TSL) and JinkoSolar Holding Co. Ltd. (NYSE:JKS) continue to expand production while governments, seeing the cost of storage rising and seeing solar prices falling below those of fossil fuels, cut back on aid.
While investors are focusing on the acquisition by Tesla Motors Inc (NASDAQ:TSLA) of SolarCity Corp (NASDAQ:SCTY) and its efforts to combine power generation with storage in its PowerWall, the real action in the space may lie elsewhere. Which is why Tesla stock is selling today for barely more than it sold for when the SolarCity deal was announced on June 21.
SolarCity has been a poor investment since 2014, because it focuses on the residential market, where the cost of supply chains, permits and fittings can be 63% of a system’s cost. These are costs Sungevity is focused on, and it will come public later this year under the ticker symbol SGVT through Easterly Acquisition Corp (OTCMKTS:EACQU), founded by investor David Easterly as a shell investment vehicle last year.
Bottom Line on Solar Energy
The solar industry today is a gangly adolescent. It is going through a transition from an interesting “green” technology into a real industry that must stand on its own to be worth your investment. It remains under continuing pressure to cut costs, to fully account for its storage needs and to find new, even cheaper ways of producing panels.
Sometimes, a great business is not a great investment. Solar will become something you can invest in once you can go down to your Home Depot Inc (NYSE:HD), pick up a system and install it yourself, or have a handyman do it at minimal cost.
My guess is we’re still three or four years away from that.
Until then, the way to play the game is short.
As of this writing, Dana Blankenhorn did not hold a position in any of the aforementioned securities.