Stocks of solar energy companies have delivered an outstanding performance over the past year. Just take a quick look at the chart for the Market Vectors Solar Energy (ETF) (NYSEARCA:KWT).
Since November 2012, the ETF jumped from $25 to around $50 today, a 100% gain in roughly eight months. That’s quite a phenomenal performance. But the hidden gem belongs to a young company with a market cap of only $2.8 billion. SolarCity Corp (NASDAQ:SCTY) first offered its shares to the public at the beginning of 2012 for a price-per-share of $9. It has since climbed to $50, only to retreat back to $38. That’s an aggregate profit of 322% in a little over a year. Head to head with SolarCity Corp (NASDAQ:SCTY) are its rivals in the solar industry — SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR).
The core business
Some companies make money by producing electricity from solar resources and then selling it to third parties. It’s a “utility- like” form of business. That’s the core business of First Solar, Inc. (NASDAQ:FSLR), for instance. According to the company’s statements, its objective is to “reduce the cost of solar electricity to levels that compete on a non-subsidized basis with the price of retail electricity.” But that’s not the business SolarCity is in. SolarCity acts as a specialized financier. The company leases solar panels to homeowners on a 20-year contract, with no up-front cost to its customers.
The result is a predictable stream of lease payments to SolarCity, as the contracts mature and homeowners make monthly payments. It’s like a bond that keeps paying interest on the capital invested. This business model is much safer than the former business model which entails heavy investments in infrastructure. I believe that under current conditions, it’s very convenient to be a solar company, mainly due to the following two reasons.
Factor #1: Less competition
In the last few years, a majority of solar energy companies have been fighting for their very survival with very few actually posting a profit. First Solar, Inc. (NASDAQ:FSLR), for example, lost $40 million and $96 million in the years 2011 and 2012, respectively. That’s why many people were questioning whether the company would survive in the long run. As a result, First Solar, Inc. (NASDAQ:FSLR)’s market value fell from $27 billion to $4 billion based on these very worries.
The same holds true for SunPower Corporation (NASDAQ:SPWR), which lost a staggering $613 million and $352 million in the years 2011 and 2012, respectively. Many investors were heavily burnt in the process. But after a large number of solar energy companies went bankrupt in the last two quarters, there’s simply fewer competitors, which means — less competition for solar survivals to worry about. That’s a cozy environment to make money in.