SunPower Corporation (SPWR), First Solar, Inc. (FSLR): Is Solar Power Still a Viable Investment?

The extraordinary rally of solar panels manufacturers’ stocks including SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR) have raised this industry’s profile in recent months. Will the staggering rise in shares of solar companies persist? Is it still a good idea to purchase these stocks?

During 2013 (year to date) shares of solar panel manufacturers spiked: SunPower’s stock sharply increased by more than 272%, First Solar’s shares by 47%. One contributing factor for these companies’ sharp rise in the stock market is their spike in revenues in the first quarter of 2013: First Solar, Inc. (NASDAQ:FSLR) revenue jumped by nearly 52% (year-over-year); net sales of SunPower Corporation (NASDAQ:SPWR) rose sharply by more than 28.6%. On the other hand, not all solar manufacturers have done well in recent quarter: SunEdison (NYSE:SUNE) revenue fell by 14.6% in the first quarter of 2013 (year-over-year). Moreover, the company is still losing money. But this didn’t stop the company’s stock spiking by more than 154% during 2013.

Looking forward, will these companies continue to show a sharp rise in revenues? Are these companies’ current valuations justified?

Is solar power a growing market?

The solar industry is growing fast. The current expectations are that solar usage will sharply rise in the coming years: The Energy Information Administration predicts U.S consumption of solar power will rise by 30% to reach 0.306 quadrillion Btu in 2013. In comparison, the total renewable consumption in the U.S is expected to rise by only 3% in 2013 (year-over-year). Moreover, solar energy consumption will rise the highest among all other renewable energy alternatives. The Solar Energy Industries Association also showed 33% growth in the installation of photovoltaic (PV) capacity in the U.S during the first quarter of 2013. This sharp rise is projected to persist.

Furthermore, the decision of U.S policymakers to cut down CO2 emissions by reducing the consumption of coal for solar is likely to keep the high growth rate of this industry in the coming years.

Thus, the industry is expected to sharply rise in 2013, which will be reflected by growth in the revenue of leading solar panel manufacturers. Will this translate to higher profits?

Panel price is falling

Despite the high growth in revenues, the price of panels continues to dwindle. According to the Solar Energy Industries Association the price of PV systems dropped by 24% in the first quarter of 2013 to $3.37/w (year over year). This fall in prices is reflected in the very low profit margins of the above-mentioned companies.