From a cursory glance, First Solar, Inc. (NASDAQ:FSLR) seems like a no-brainer investment. You can stretch the argument to include all other solar stocks, such as China’s Trina Solar Limited (ADR) (NYSE:TSL) and JA Solar Holdings Co., Ltd. (ADR) (NASDAQ:JASO). No other sector allows you the possibility of an endless source of energy. Not only that, FSLR stock is terrific performer this year — up 55%.
Although InvestorPlace’s Ryan Fuhrmann is doubtful, the first third of his article would get anyone excited about solar stocks. First, Fuhrmann acknowledges that this clean-energy sector is skyrocketing. According to some industry experts, solar is forecasted to achieve 11 straight years of increasing demand. Furthermore, global demand this year should total up to 79 gigawatts.
And while President Donald Trump ran on “make America great again,” the slogan should have been “make America bright again.” According to a Reuters report, “Jobs in the U.S. solar industry grew 25% last year to include more than 260,000 workers.” Better yet, FSLR stock is poised to benefit from a political catalyst.
Unless you’ve deliberately decided to turn off your television, you know that Trump isn’t exactly popular. White House drama magnifies the perception problem. The Commander-in-Chief can do himself a lot of good by actively supporting solar-energy initiatives.
In addition, FSLR stock enjoys a tailwind due to tax benefits for consumers who make the switch. Installing a First Solar system can help residences and businesses mitigate dependency on antiquated power grids. Such energy diversification is especially useful during blackouts or periods of high energy costs.
On the surface, investors should be jumping all over First Solar and solar stocks in general. However, several reasons exist why the industry is a little bit too good to be true.
Solar Is a Questionable Industry
“There’s no such thing as a free lunch.” This isn’t just a business or economic saw, it applies also to the physical world. I live in earthquake-prone California where emergency preparedness is a must. Several years ago, I purchased a solar-powered flashlight from a company called Goal Zero. The device only met my satisfaction temporarily. Within a few months, the device broke. More significantly, I realized it required an inordinate amount of “sun charging” to receive modest light.
Scale this dilemma up, and you can see the potential challenge for First Solar and other solar stocks. Rather than a “free” energy source, solar power is inefficient and requires a practical tradeoff. If you’re looking to emit a small house light, any old panel will do. But if you want to run your air conditioner, you have to either expend a lot of time, or invest in a lot of panels (and real estate). Remember, time is money.
I encourage anyone considering FSLR stock to check out Goal Zero’s lithium-powered solar generator. This bad boy can power your refrigerator for up to 24 hours on a single charge. The problem? A single charge requires six hours (or more) of solar charging or 25 hours from your AC outlet! To run your fridge continuously — and only your fridge — requires two of these devices (MSRP $1999.99).
Solar Energy Is a Not a Panacea
Fuhrmann writes that “A huge problem for First Solar (and therefore shareholders) is the industry is fast developing and highly dependent on impressive, but unpredictable technological advancements.” Impressive technological advancements means cheating physics.
Unfortunately for FSLR stock, you can’t cheat physics. Isaac Newton’s “second law of thermodynamics forbids a 100%-efficient solar cell,” according to Harvard-educated physicist Steve Byrnes. First Solar is stymied by the impossibility of producing a solar device with 100% efficiency.
If it were possible to power our society with the sun, we would have already done it by now. FSLR stock would be permanently lodged in the stratosphere. But again, the Newtonian compromise impinges upon solar companies and solar stocks. To receive “free energy” requires an expenditure in time, equipment and real estate.
While First Solar and its ilk seem appealing, the science isn’t in favor of FSLR stock. According to Byrnes, solar’s theoretical maximum efficiency is 55%. While 100% solar efficiency isn’t necessary for any legitimate power source, solar isn’t the panacea many believe it to be. At the present efficiency rate, we’d need exponentially more solar panels and more time to generate power on a meaningful scale (remember the fridge?). And at that rate, the economics just do not work out.
This isn’t to say that FSLR stock is a terrible investment. Under the right circumstances and the right price, First Solar might prove profitable. But the last thing you should do is to jump in on FSLR just because of the industry’s “potential.” Like anything else, the devil is in the details.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.