In light of the headwinds that face the solar industry, many investors and traders might be inclined to agree. However, market opinion is not uniform: Plenty of well-informed writers and investors believe that the global solar industry has reached a critical mass and stands on the threshold of a years-long boom. Investors who want to gain long or short exposure to the solar space would do well to weigh these competing arguments and take a closer look at three important players.
Recent Price Action
Despite these questionable financial statistics, all three of these companies have performed well relative to the broader market. Since the beginning of April, SolarCity Corp (NASDAQ:SCTY)’s stock has jumped from $20 per share to more than $45 per share. SunPower Corporation (NASDAQ:SPWR) has spiked by more than 100% as well, and First Solar, Inc. (NASDAQ:FSLR) continues to rise sharply. Since many market-watchers felt that these companies were already expensive at their pre-spike levels, this price action has left many seasoned traders in disbelief.
Other Noteworthy Happenings
It should be noted that SunPower Corporation (NASDAQ:SPWR) recently took out a large credit line to finance its ongoing operations. It sold the bulk of this offering to its principal shareholder, a subsidiary of French integrated oil major Total S.A. (TOT). This paints a mixed picture for the company. On the one hand, it is good that the firm can secure low-cost financing from a major oil company. SolarCity Corp (NASDAQ:SCTY) and First Solar, Inc. (NASDAQ:FSLR) do not have such an option. On the other hand, this development suggests that SunPower Corporation (NASDAQ:SPWR) may encounter some liquidity issues in the future.
Comparison
Solar City, SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR) all engage in similar areas of operation and maintain a similar mix of institutional and end-user clients. As such, comparing their financial statements and structures is a fairly straightforward affair.
For starters, First Solar is the largest of these three companies by market capitalization. Its $4.5 billion valuation is about 25% larger than Solar City’s $3.3 billion figure and about 50% larger than SunPower’s $2.2 billion capitalization. Unfortunately, First Solar is the only firm that is even marginally profitable, and its results have not yet demonstrated a sustained ability to turn a profit in the absence of significant incentives for solar manufacturers and end-users. In 2012, First Solar, Inc. (NASDAQ:FSLR) earned about $412 million on revenues of $3.6 billion. For comparison, SolarCity Corp (NASDAQ:SCTY) posted a loss of $105 million on total revenues of about $133 million. SunPower Corporation (NASDAQ:SPWR) lost $332 million on about $2.6 billion in gross 2012 revenues.
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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