JinkoSolar (NYSE:JKS) has had a remarkable past 12 months. JKS stock collapsed from $20 down to as low as $7 during the fall. It was weighed down by a variety of concerns including tariffs and changes in its domestic Chinese market that crushed demand.
Despite these difficulties, Jinko stock rocketed back up. Shares have nearly tripled recently. The situation with tariffs hasn’t turned out to be as bad as feared. Meanwhile, Jinko produced the substantial majority of its sales outside of China last quarter. This shows that it is much less vulnerable to changes there locally, contrary to investors’ prior expectations. That said, this run in JKS stock is a gift, and owners should strongly consider taking profits.
Solar Manufacturers: Too Much Competition
According to the Power Intelligence Center JinkoSolar remained the world’s leading panel manufacturer for another year. In 2018, despite challenging market conditions, Jinko stayed well clear of JA Solar (NASDAQ:JASO) and Trina Solar for the top spot. Jinko held 13% market share, while JA Solar pulled in almost 10% and Trina got 9%.
As you can tell from those numbers, the industry remains highly fragmented. Eleven different companies hold at least 3% of the market, with influential First Solar (NASDAQ:FSLR) way down at No. 11 with 3% market share. That should give you a sense of how competitive the solar industry is. Unfortunately, that leads to a great deal of redundant overhead and research among these various firms.
In the long run, for solar to be a more reliable investment sector, these companies need to consolidate. There simply isn’t enough revenue for all these operations to produce consistent profits as things stand now. That’s particularly true as solar panel prices continue to plummet. Even despite generally rising demand and an increasing backlog of future orders, the overall industry is seeing plunging revenues.
Power Intelligence Center estimates that the solar market will shrink from $32 billion in 2018 to just $20 billion overall in 2022, representing a more than 10% regression in its annual growth rate. That will make already dicey financial situations across the industry look even worse. This is a classic race to the bottom.
JinkoSolar: A Difficult Decade
JinkoSolar, despite being the industry leader in total shipments, doesn’t have a robust balance sheet. The company has around $1 billion in net debt. This is problematic as Jinko doesn’t produce much cash flow to cover its expenses.
In fact, free cash flow has run negative for five straight years. At some point, the company needs to be able to turn revenues into cash available to pay down debt. So far, it has been a challenge. And with panel prices continuing their aggressive declines, it seems like JinkoSolar is stuck running on a treadmill.
And that has produced very poor long-term results for JKS stock. In 2011, the stock traded in the $20-$30 range. It hit rock bottom the next year, losing as much as 90% of its value while reaching the $2 level. Shares bounced back in 2013 after the company’s financial situation improved. Still, it wasn’t a new era of sustained prosperity. Shares never topped their old highs, and then collapsed back to $7 last year.
As long as the company’s balance sheet is weak and it doesn’t generate much cash from operations, shares will be trapped in a boom bust cycle. This is not a favorable place for long-term investors, though there are certainly plenty of trading opportunities due to the high level of volatility in JKS stock.
Sunnier Days Ahead?
Arguably the best hope for JKS stock, and others in the industry, is a huge upswing in demand. Incremental new orders simply won’t get the job done, solar needs an exponential growth curve to overcome its plummeting cost of production. What could bring about rapidly faster adoption? Changes in the political climate seem like the best source of hope.
Donald Trump’s election sent a wave of fear through the industry with all his rhetoric about climate change and support of other energy sources such as coal. Interestingly enough, his presidency hasn’t actually been that terrible for solar directly. The policy on tariffs, however, has been a huge stumbling block, though things are looking better on that front lately.
Regardless, 2020 offers the potential for a big swing in the political climate. The field of Democratic candidates, in particular, look much more aggressive on energy than we’ve seen in the past. This could set the stage for a huge energy investment — a 2020s Manhattan Project for green producers. The Green New Deal proposal seems somewhat unrealistic and unlikely to gain traction in its current form. But the mere fact that senators are seriously considering an initiative that would likely have costs running in the tens of trillions of dollars shows that the political climate is shifting. For a company like JinkoSolar with a modest market cap of just $3.2 billion even after its recent run, a huge government investment would have the potential to cause JKS stock to post stratospheric gains.
Bottom Line on JKS Stock
I’m still skeptical on solar stocks, however, even if the political climate improves. There are way too many firms fighting over a shrinking revenue pie. So far, contrary to what you might expect, there hasn’t been a great deal of M&A within solar that would clear these roadblocks. For a cyclical industry like this, you simply need a better balance sheet to weather market swings.
And political changes may not be a panacea for JinkoSolar either. For example, Bill Gates, who now specializes in energy investing, suggests that solar simply isn’t a huge long-term solution. Speaking at a Stanford energy event, Gates said that nuclear and fusion are the only practical answers for green energy production. Asked about wind and solar advances, Gates said that it is “so disappointing” that observers see those as large scale fixes for the utility industry. You need some “monster miracle” in battery technology for grid storage for intermittent sources, Gates said, that would be orders of magnitude ahead of what we have today that can power small-scale uses such as EVs. As we go from lofty rhetoric about climate change down to what can actually be achieved economically, solar may see its role diminish.
With JKS stock up big, this is the time to take profits. With a boom and bust stock, you’re usually making a good move to sell after shares have tripled in a short period of time. The political environment may get better for Jinko in the future. But investing based on politics can be risky, and there’s no guarantee solar will be the solution, even if a Green New Deal gains further momentum.
At the time of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.