Judging by the market's reaction yesterday to First Solar's (Nasdaq: FSLR ) lowered guidance, it may appear to observers that the solar market is all but dead.
But let's not confuse falling stock prices with an industry being in trouble. As is often the case in emerging industries, the growing pains can be, well, painful. Bankruptcies have started to make headlines in 2011, and the real shakeout of suppliers will take much more than the exposure of a few weak manufacturers.
Solar stocks are a minefield right now, but if we decouple these stocks from the health of the industry itself, the story looks a little rosier. So below I have highlighted some of the trends investors and industry observers should keep in mind when asking themselves whether solar is dead.
The important numbers
According to a recent report by GTM Research and the Solar Energy Industries Association, U.S. PV installations in the third quarter reached a record 449 MW, 140% growth year over year, more than all of the solar installed in 2009, and nearly matching the first three quarters of 2010 combined. The tremendous growth recently has been driven by massive utility scale projects from First Solar, NRG Energy (NYSE: NRG ) , and many others.
The Solar Foundation says there are now more than 100,000 people working in the solar industry in the U.S. and employers are expected to add another 24,000 jobs by August 2012.
Quarter over quarter, the weighted average installed price of solar in the U.S. fell from $5.20/watt to $4.45/watt driven by utility scale projects. Residential costs fell $0.17 to $6.24 per watt, nonresidential fell $0.26 to $4.94 per watt, and utility scale solar fell $0.30 to $3.45 per watt.
Judging by the outstanding growth and falling costs, the solar market in the U.S. seems to be improving quite rapidly. In fact, manufacturers such as Suntech Power (NYSE: STP ) , Trina Solar (NYSE: TSL ) , and Yingli Green Energy (NYSE: YGE ) are pointing to the U.S. as one of the most stable solar markets right now.
Of course, there are more than a few concerns outstanding.
The effect politics has had on solar may be the death knell for some companies and could hold back further progress in 2012. In Europe, squabbling over a solution to the region's debt problems has left installers unable to finance viable projects. Here in the U.S., Republicans are holding up an extension to the 1603 Treasury Program, which gives a tax credit in a cash grant in lieu of an ordinary tax credit.
This is important in the U.S. because the solar industry alone has grown to more than 100,000 workers and according to a group of industry participants has driven $23 billion in investments in 22,000 projects.
That doesn't mean the entire industry is healthy
So the industry as a whole is growing, at least here in the U.S., costs are falling, and jobs are being created. All of those are positive signs for solar.
But that doesn't mean investors should rush into just any solar manufacturer this holiday season. As the drop in First Solar yesterday shows now every company is on the right side of industry trends. Suppliers such as LDK Solar (NYSE: LDK ) and JA Solar (Nasdaq: JASO ) have seen sales flounder under weak demand, and low efficiency manufacturers are being hit especially hard. Stronger manufacturers with high efficiency modules have had margins squeezed, but with installers seeking quality, these companies will be the winners in the end.
Just like the early computer business or early in the Internet's development, the strong, high-quality companies will survive and the weak will slowly die off. As they do, it looks like trouble for the industry, but it's actually making the industry as a whole stronger.
Foolish bottom line
Just because solar stocks are down doesn't mean the industry is in trouble, and just because the industry is improving doesn't mean you should be buying solar stocks. Be judicious and consider companies with project development pipelines and high efficiency modules first.
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