Solar stocks are finally hot in 2020, after a decade of lagging the market.
Companies making solar panels were laggards because of deflation. Costs came down, but so did prices. Companies had to run hard to stay in place. They grew but failed to expand margins.
The environmental disasters of 2020, however, put a different gloss on things. Now, everyone wants a green revolution. Profits, not just promises, seem to be on the horizon.
But the tech world continues to change. What was renewable energy in the last decade is about to become energy harvesting.
That means capital goods — like the racks of solar panels on warehouses and over parking lots — are about to be supplemented by a host of other technologies that harvest energy from everyday life.
New materials like plastics and perovskites will harvest solar energy from every window. Windmills will go into road medians and harvest energy there. Your smartwatch may recharge from the action of your wrist. Efficiency will also continue to reduce energy demand.
Will all this supplement today’s solar companies, or press them further? How much oil and gas demand might energy harvesting on a mass scale soak up?
The future looks renewable, but are these seven solar stocks the right names to play? That’s what you must decide.
- First Solar (NASDAQ:FSLR)
- SunPower (NASDAQ:SPWR)
- Canadian Solar (NASDAQ:CSIQ)
- Sunrun (NASDAQ:RUN)
- NextEra Energy (NYSE:NEE)
- Plug Power (NASDAQ:PLUG)
- SolarWindow Technologies (OTCMKTS:WNDW)
Solar Stocks: First Solar (FSLR)
First Solar has been making thin film solar panels from cadmium telluride since the 2000s. And at one point, it was a hot stock, with shares rising over $300 in 2008.
But rising oil supplies and Chinese competition quickly pushed prices down. By 2012, FSLR stock was selling at $15. Now shares are up again — above $80.
There’s no obvious catalyst for this rise, beyond the usual Wall Street tub-thumping. Yes, Joe Biden likes solar. Yes, First Solar is one of the few truly American plays in the space, with a plant outside Toledo. First Solar has gone away from doing its own engineering and construction. Capital spending has been cut to the bone. It’s now just a panel maker.
Second-quarter analysts saw year-over-year sales growth of just 10%. Only $37 million hit the net income line. But in June there was $1.6 billion of cash and equivalents on the books, and just $585 million of long-term debt.
First Solar is also very good at recycling. It recovers 90% of the material from old panels. It has a sustainable supply chain. In places where this matters, like Europe, this is winning First Solar new contracts.
But it’s not wise to expect politics to make you rich. Like the rest of the industry, First Solar is not ready for the change new materials and techniques are bringing. I think its conservatism is about to catch up with it.
As interest in solar power has increased this fall, SunPower has become a hot stock.
How hot? SPWR shares opened for trade today at nearly $17 — a market capitalization of $2.9 billion. Importantly, analysts expect SunPower to bring in just $1.9 billion of revenue this year.
Through most of the last decade SunPower underperformed as a vertically integrated supplier of solar panels and services for both residential and utility markets. Today, it is a reseller of Chinese solar panels.
Last year, it spun out its manufacturing arm under the name Maxeon Solar Technologies (NASDAQ:MAXN). Its Chinese partner, Tianjin Zhonghuan Semiconductor, put nearly $300 million into Maxeon, which also does business in Malaysia, Mexico, the Philippines and France. Maxeon, in turn, has an exclusive deal to supply SunPower with panels. Its new structure should enhance shareholder value.
All this is being blessed by Total (NYSE:TOT), the French oil company that has been SunPower’s dominant shareholder since 2011. Total originally invested in SunPower at $23.25 per share. That investment is still underwater. But Total believed in the new SunPower structure enough to increase its stake, buying 676,000 shares for $31 million.
But how exactly does the new SunPower work? It moves its panels through complex solar leases. The idea is that a solar lease finances the panels and homeowners buy electricity. SunPower now includes its SunVault batteries in these deals.
Essentially, SunPower today is a financing and power sales company. If you want to buy a solar panel company, buy Maxeon.
Solar Stocks: Canadian Solar (CSIQ)
Canadian Solar trades at a huge discount to First Solar because it’s not really Canadian. Sure, the company is based in Guelph, about an hour outside of Toronto, and it has a module plant there. But that plant stems from a “buy Canadian” requirement.
Much of Canadian Solar’s work is done in China, where it has two locations outside Shanghai. It depends for raw materials on a polysilicon plant in Xinjiang where an explosion in July sent prices skyrocketing. One of its largest power projects is also in Xinjiang.
Canadian Solar is also diversified. It not only manufactures panels but installs them. It has double-sided panels and has claimed efficiency of nearly 24%.
The stock is still subject to a “China discount,” caused by its Chinese ties. Management’s solution is to raise money in China, starting with a $260 million debt offering, followed by a Chinese IPO covering the production business.
There are a lot of moving parts to Canadian Solar. It may be the most global solar company American investors can buy. It has subsidiaries in 20 countries, customers in 160 countries and 17 manufacturing plants. Unlike First Solar, which is strictly a panel maker, Canadian Solar is also a developer, often selling utility-scaled projects before they’re fully built.
I’m more favorably disposed to Canadian Solar stock than First Solar. It’s growing, it may still be undervalued and I like globalism. Because of that globalism, CSIQ may be better able to navigate the next moves in solar technology.
With the acquisition of Vivint Solar, Sunrun is now the unquestioned king of the U.S. solar market.
Is it good to be the king?
Sunrun opened for trade this morning at about $64 share. That’s a market cap of $12.7 billion, with 20% of what is otherwise a highly fragmented market. The two companies had combined revenue of about $2 billion last year. They’re also complementary. Sunrun focused on direct sales to the corporate market and combining panels with batteries. Vivint focused on homeowners with power purchase agreements, as well as loans and cash sales.
What Sunrun is emphasizing in the Vivint deal is its scale. The company can now partner directly with utilities such as Duke Energy (NYSE:DUK) on residential solar. It has also closed a deal with Chanel, the luxury goods company, to increase solar power in low-income areas and train low-income people for jobs as installers.
Analysts have been pounding the table all year for Sunrun stock, which at its height was up 400% for the year. Even with recent profit-taking, the shares are up 360% in 2020. Analysts trumpet $90 million in “synergies” and a rise of $8,000 in the net present value per customer. Solar deals promoted through utilities, like the one with Duke Energy, add to the excitement.
My problem with Sunrun is the same as the one with SunPower.
There’s a new generation of product coming over the next few years, thin-film panels built with things like plastic and perovskite. These are going to upend the current solar business model. The next generation of cells will be bought as consumer products.
It’s the same thing that happened when personal computers came of age in the 1980s. Sunrun may be left selling mainframes in a PC age.
Solar Stocks: NextEra Energy (NEE)
Of all the utility stocks now, NextEra Energy is the most popular. Why? It serves most of Florida with a unique business model.
The business model is renewable energy. NextEra has a subsidiary called NextEra Energy Resources that buys power from wind and solar farms, then sells it. NextEra’s Florida Power & Light is a customer. Wash, rinse, repeat.
The company’s green reputation, and a steadily rising dividend, have made it such a hot stock it recently passed Exxon Mobil (NYSE:XOM) in market cap. This came soon after it announced a 4-for-1 stock split. Analysts say it’s getting a “Biden bump.”
The secret sauce to NextEra is NextEra Energy Partners (NYSE:NEP). This is a renewable energy producer, mainly owning wind projects. It’s not a master limited partnership (MLP), but it operates in much the same way. NextEra launched it in 2014 and it now has a market cap of $4.2 billion.
NextEra has a green reputation, but also operates five nuclear plants, including Seabrook Station in New Hampshire. CEO Jim Robo sees nuclear and natural gas as bridges to wind and solar. Nuclear plants provide reliable power he can sell as green to other utilities besides Florida Power & Light. FPL, in turn, provides baseload demand for NextEra’s energy production facilities.
Despite its green reputation and bottom-line success, NextEra faces hostile state regulators. Its 2016 effort to buy Hawaiian Electric Industries was rejected. So was its 2017 effort to buy Oncor Electric Delivery in Texas. Several state regulators would have to approve its acquisition of Duke.
While NEE is richly priced at 42 times trailing earnings, it has proven its business model against stiff industry resistance. The only thing that could change its trajectory might be if that resistance breaks. So far there’s no sign of it.
Plug Power (PLUG)
As with other speculative stocks over the last few years, Plug Power is rising well ahead of fundamentals.
That doesn’t mean it can’t continue.
Powering Plug Power is the company’s decision to control its supply chain. In June, it bought two hydrogen companies, United Hydrogen Group and Giner ELX.
United Hydrogen operates a plant Tennessee that can produce 6.4 tons of hydrogen per day, with a plan to increase that to 10 tons. The United plant sits next to an Olin (NYSE:OLN) chlor-alkali plant that uses electrolysis to make things like chlorine and caustic soda from brine. Instead of venting the resulting hydrogen, United captures it and sells it.
The United and Giner deals could result in a complete hydrogen supply chain without natural gas as a feedstock. This has been a big problem for the industry. Why buy hydrogen when you can just burn gas? The reason, in warehouses like those Plug Power supplies, is that natural gas burns while hydrogen is combined with oxygen to produce water.
Plug Power is now pitching itself as a hydrogen supplier, not just a maker of forklifts. It believes the market could be worth $140 billion in 10 years. Such studies have long existed, but supply has been the gating factor to growth. Plug Power itself faces limitations in hydrogen supply.
If Plug can use all of Olin’s chlor-alkali plants to produce hydrogen, supply won’t be a problem. Plug Power could, in theory, buy Olin for stock and control its destiny. However, it must find the demand to justify increasing its supply.
For now, if you believe in Plug Power, consider buying Olin.
Solar Stocks: SolarWindow Technologies (WNDW)
Over the next decade, solar power will evolve into a consumer product, something you can buy and use with ease like your smartphone.
SolarWindow Technologies is part of that evolution. Its product is a liquid capable of creating an electric charge when applied to glass or plastic. Charge is harvested by a grid of tiny wires, each thinner than a human hair.
This sounds amazingly innovative. However, SolarWindow has competition. ClearVue Technologies, which lists in Australia, sells glass integrated with solar cells. It claim its design generates 30 watts per square meter of glass. Ubiquitous Energy, based in San Francisco, has a similar idea.
SolarWindow’s key man now is John Rhee, former CEO of the Nobel Sustainability Trust. Rhee brought the company an office in South Korea. He also has quickly built a new executive team around the product. His appointment caused the stock price to spike above $5. While it has since given up most of that gain, it’s still up 40% on the year.
If you’re speculating on SolarWindow stock, you’re betting on Rhee. It’s his new team that must take the company’s coating and process from a dream into a market reality.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.