JinkoSolar (NYSE:JKS) stock illustrates how the Chinese won the first stage of the solar market.
JKS stock is currently trading around $63, earning it a market capitalization of about $3 billion, on 2019 sales of almost $4.3 billion. The stock has been on fire since its second-quarter report, beating analyst estimates with a net income of $45 million, 93 cents per share fully diluted, and revenue of $1.2 billion.
These numbers set off a battle, with shorts doubting it could continue. Short volume — which was near 10% at the end of September — hit a high of nearly 42% on Oct. 8. But some have warned about this rally.
While Jinko’s short-term future may appear bright, don’t get too carried away.
History of JKS Stock
JinkoSolar is one of many Chinese solar companies formed in the 2000s in response to the nation’s air pollution crisis. Fueled by coal and oil, the country had become environmentally overwhelmed, and the smog was choking people.
As detailed in books like “How Asia Works” by Joe Studwell, China’s industrial policy is to subsidize many of the players in the sectors it wants, then reduce subsidies as winners emerge in global markets.
Along the way, JinkoSolar and its competitors cut the costs on silicon wafer technology to the bone. That resulted in today’s solar panels delivering energy for just pennies per kilowatt hour. In fact, in a few years, solar could cost less than existing natural gas plants.
The trouble is that this competition and growth hasn’t left a lot of money for shareholders. Until September’s run-up, JinkoSolar shares hadn’t budged in 5 years. In March 2020, JKS stock sold for less than it did nine years before.
What is JinkoSolar Doing?
Seeing profit on the horizon, JinkoSolar is trying to capitalize.
The company plans to list in Shanghai. In preparation for that listing, it has taken investments from management worth over 26% of the company. Once the company lists in China, you can expect its stock price to rise, but your investment has already been watered down. Against that, the new capital will help JinkoSolar double production up to 30 gigawatts by the end of the year.
Management isn’t alone in seeking to capitalize on the good times. Institutional investors in the U.S. like Goldman Sachs (NYSE:GS) have been holding dead money for years. As Larry Ramer recently wrote, they saw an opportunity to squeeze the shorts and they took it.
That’s why some have recently issued a “sell” on JKS stock. While the fundamentals look good, technical indicators do not. InvestorPlace contributor Tim Biggam recommended selling an out-of-the-money call through December. Selling a call is a bet that the price will go down before the option expires.
By focusing on cutting costs while simultaneously increasing production, JKS stock has won the domestic war. It has also succeeded in crushing American solar companies — for instance, Sunpower (NASDAQ:SPWR) spun out its manufacturing to Maxeon Technologies (NASDAQ:MAXN) with a Chinese partner. Additionally, rising tariffs have given the whole industry a “Trump thump,” although global demand remains strong.
But this is just the industry’s first wave. Solar panels today are capital goods, like computers were 50 years ago. Newer technologies — using plastics, perovskite, and liquids that can make any window into a solar panel — will do to this business model what the PC did to mainframes.
Sooner or later, solar is going to become a consumer product — and like IBM (NYSE:IBM) did with its 1981 PC, JinkoSolar will have to adapt.
If the company doesn’t consider this future, that doesn’t mean it will disappear. Mainframes still exist. They’re just not the heart of the industry anymore.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.