While solar technology was once confined to pipe dreams and college kit car races, technological advances and government mandates have moved the solar business into the mainstream. Consumer demand generated by healthy tax credits has allowed companies to gain manufacturing efficiencies and lower unit costs, helping to move the industry closer to parity with fossil fuels. Even the utility sector has finally taken notice, as giants like NRG Energy Inc (NYSE:AIG), Exelon Corporation (NYSE:EXC), and Berkshire Hathaway Inc. (NYSE:BRK.A)’s MidAmerican subsidiary are investing billions in solar plants. Despite profit challenges for the industry, renewable energy is here to stay. So, how does an investor play this sector?
SunPower Corporation (NASDAQ:SPWR) would be a good choice, as it has been a pioneer in the solar business with silicon-based solar cells that lead the industry in efficiency. The company has a strong position in the residential segment, but has been making a push into large commercial projects, including California’s massive Antelope Valley Solar Project. SunPower Corporation (NASDAQ:SPWR) has also pushed economies of vertical integration through its joint ventures in the silicon production and wafer processing areas.
SunPower Corporation (NASDAQ:SPWR) had trouble gaining sales momentum in FY2012, with total revenue up 1.8%, as growth in its Americas and Asia-Pacific regions was offset by very weak performance in its European region. Despite delivering 13% more solar products than in the previous year, based on electricity generating capacity, the company’s product prices continued to decline due to excess inventories around the world. In addition, some countries have downwardly revised their subsidies to the industry, especially members of the European Union.
Regardless of the industry’s current supply-demand imbalance, SunPower Corporation (NASDAQ:SPWR) is thinking long term and is working to complete its plant in Mexico, which will add 12 assembly lines and nearly double its annual capacity. Given lower expected future prices for solar products, the company needs to gain greater scale in order to reach its profit breakeven level. Fortunately, SunPower Corporation (NASDAQ:SPWR) has a strong ally in majority shareholder Total SA (ADR) (NYSE:TOT), which provides crucial capital and a global network of contacts.
Another good choice would be First Solar, Inc. (NASDAQ:FSLR), the world’s largest producer of thin film-based solar products. Despite a slight overall disadvantage to silicon technology in sunlight conversion efficiency, thin film products perform better in high temperature, sunny climates that figure prominently in utility companies’ future capital plans. More importantly, First Solar, Inc. (NASDAQ:FSLR)’s technology allows it to avoid the high costs of the silicon supply chain, leading to a higher gross margin across business cycles.