Meanwhile, First Solar, Inc. (NASDAQ:FSLR) has about $2 in cash for every $1 in debt and enjoys operating cash flow of about $844 million. SunPower has a debt load of over $750 million, a cash hoard of just over $500 million, and an operating cash flow figure of about $316 million. SolarCity Corp (NASDAQ:SCTY) has more than twice as much debt as cash and has a sharply negative levered free cash flow figure.
Industry Fundamentals and Outlook
From a valuation perspective, it is clear that Solar City is in particularly bad shape relative to its industry peers. Some market veterans have argued that its gravity-defying price run-up is the result of a “violent short squeeze” that could soon correct itself. If this theory is correct, Solar City may be setting itself up for another round of aggressive shorting that could drive its price down to more reasonable levels.
More generally, increasing competition from Chinese solar panel manufacturers and the specter of weakened government support for the industry could soon put an end to the so-called solar party. While researchers have made significant strides toward reducing the cost of solar panels and increasing the efficiency of their energy-production mechanism, they remain expensive relative to “clean” fuels like natural gas and renewable energy sources like wind power.
Potential Plays
In the long run, the solar industry could well become a major force in the global economy. For now, weaker companies like Solar City may represent excellent short-side opportunities for aggressive investors. While conservative investors with longer time horizons should generally avoid short plays, SolarCity Corp (NASDAQ:SCTY) is shaping up as a classic short. Given its seemingly strong reserve of support from an established firm, SunPower does not appear to offer the same opportunity. Meanwhile, First Solar’s somewhat stronger financial position suggests that it may not fall as quickly as Solar City. However, it still looks overvalued at these levels.
In short, aggressive investors may be able to turn a quick profit by opening short positions in SolarCity Corp (NASDAQ:SCTY) and other weak solar power companies. However, it is important not to paint all of these firms with the same brush. SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR) have different fundamentals that may support their stock prices for longer. As always, investors must conduct their own research before committing funds to any position.
The article After Rapid Rise, Are These Solar Companies Setting the Stage for Disaster? originally appeared on Fool.com and is written by Mike Thiessen.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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