A Foolish Take on Solar: First Solar, Inc. (FSLR), SolarCity Corp (SCTY)

After bottoming-out over the summer, First Solar, Inc. (NASDAQ:FSLR) has recovered nicely, and now stands at roughly the same price it had a year ago. The Suntech problems caused a recent dip in the price, making it even more attractive.

First Solar, Inc. (NASDAQ:FSLR) makes its panels from what’s called cadmium telluride, byproducts of other mining processes, so it has some control over front-end costs. It has a big factory in Malaysia, so it has some control over labor costs. More important, it has proven itself adept as a solar developer, producing a number of utility-sized projects that it sells to power companies, including Mid-American, part of Berkshire Hathaway Inc. (NYSE:BRK.A). When you have control of both your costs and the downstream sales, you have a functioning business model.

The sector’s biggest winner has been SolarCity Corp (NASDAQ:SCTY), which is in the business of selling and financing small residential and commercial solar projects. SolarCity Corp (NASDAQ:SCTY) doesn’t make panels. It buys them, installs them, and finances the installations. It has salesmen who know how to create deals, and the deals it does is profitable. Just since its IPO last year, SolarCity Corp (NASDAQ:SCTY) is up nearly 40%, even with a recent pull-back. You can expect other, similar deals to come to IPO later this year, given this success.

A Final Warning

But beware. While you want to be on the selling side right now, the situation will shift as grid parity drives real demand. Margins are bound to decrease as a result of grid parity, just as they did in the computer industry 35 years ago when the PC emerged, and a mass market developed.

So while the profits of SolarCity Corp (NASDAQ:SCTY) may seem attractive, you want to be in companies like First Solar, Inc. (NASDAQ:FSLR). And be alert to new IPOs, based on newer, lower-cost technology. It’s not yet certain that materials like cadmium telluride will triumph in this sector, and you want to be in the newer, cheaper stuff as soon as you can.

Drive down the cost curve with solar and you will do OK.

The article A Foolish Take on Solar originally appeared on Fool.com and is written by Dana Blankenhorn.

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