Why Solar Stocks Are a Long-Term Sell
Amid a number of earnings releases from leading solar companies First Solar (FSLR), Sunpower (SPWRA), and MEMC Electronics (WFR), there is plenty of news to digest on such a dynamic sector. Regardless of how this particular quarter’s numbers pan out, I believe one inevitable truth will eventually assert itself: solar stocks are nothing special.
Solar stocks generally trade at generous multiples to book and EBITDA, and some of them seem to deserve premiums because of high profitability numbers. First Solar, for instance, has operating margins just shy of 40%; MEMC has operating margins of 25%. But such situations rarely persist, and given the industry value chain the solar companies operate within, it will be almost impossible for the great number of competitors to all come out ahead.
Although solar stocks often carry a sexy perception of growth and technology, the reality remains that the companies are beholden to electricity producers – namely regulated utility companies domestically, and either similarly regulated utilities or government-backed enterprises globally. In other words, the customer base for solar companies consist of utilities with limited ability to generate profits or governments with enormous bargaining power. Those are conditions that lead to a vicious price war that undermines profitability for the entire sector, not consistent growth with steady bottom-line results to match.
My view of solar stocks may be different than many market participants, but the interest and amount of capital that has followed the green energy space is a sign in itself that the industry as a whole is not likely to have excellent potential in the near future. In general, a good strategy in these situations is to sell when speculation becomes rampant, but that’s not the case at present – most of the stocks are down significantly from their summer highs, and the recent plunge is only a continuation of that trend.