SunPower Corporation (SPWR), First Solar, Inc. (FSLR): How Should You Play This Space Here On Out?

Leading solar panels manufacturers such as SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR) have done very well in the past several months in the stock market. Many investors are turning towards investing in solar energy and believe these companies will eventually lead to profits with positive return on investment. Is it worth investing in solar manufacturers or other related companies to solar energy? Is high growth in solar panel usage enough to make these investments worth considering? Let’s try to answer these questions.

Since the beginning of the year shares of solar panels manufacturers sharply increased: the stock price of SunPower Corporation (NASDAQ:SPWR) spiked by more than 174% (YTD); shares of First Solar, Inc. (NASDAQ:FSLR) also rose by 40%. These companies’ first quarter reports were good but I suspect this rally is related to potential future growth these companies are likely to achieve in the near future. So let’s first examine the solar market. Is it growing so fast?

The solar industry is growing at a very fast pace: in 2012 the solar energy consumption in the U.S grew by nearly 34% (y-o-y) as it reached 0.212 quadrillion Btu. In 2013, the EIA projects the growth in solar consumption will grow by nearly 28% to reach 0.272 quadrillion Btu. Most of the growth in consumption will come from the electric power sector that is expected to rise by nearly 75% in 2013 (y-o-y). Furthermore, the recent rise in the prices of natural gas compared to last year will only make solar energy a cheaper substitute for electric companies. So we know this industry is projected to grow at a very fast pace. But is it profitable?

One of the reasons for the rise in consumption in solar is the ongoing drop in prices of solar panels (opens pdf): since the beginning of 2011, prices fell by more than 60%. The sharp drop in prices may have contributed to the rise in demand for solar panels but is also likely to keep solar manufacturers’ profit margins low. Let’s see how leading solar panels manufacturers have done in the first quarter of 2013:

The company invests most of its cash flow from operating activity into investing activities: in the first quarter the company spent nearly $141 million on purchasing properties, equipment and marketable securities. The company’s high investment costs are likely to keep First Solar, Inc. (NASDAQ:FSLR)’s growth in revenues. The company is also expanding its operations outside of U.S to other growing markets such as China and India. Nonetheless, its profit margin is likely to keep falling as the competition will continue to heat up. This could make this company less attractive as a long term investment.