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Not all solar companies are created equal. As the industry shakes out, the weak will fall, and the strong will thrive, a natural occurrence in a market that's still years away from maturity.
That's why it's important to look at the earnings reports from First Solar (NASDAQ: FSLR ) , SunPower (NASDAQ: SPWR ) , SunEdison (NASDAQOTH: SUNEQ ) , and SolarCity (NASDAQ: SCTY ) through very different lenses. SunPower started off earnings season with outstanding results, announcing that it would run its factories at capacity for the next 18 months, while upping earnings guidance. First Solar did just the opposite, reporting disappointing revenue and earnings, while lowering guidance. SunEdison was somewhere in-between, but was nonetheless pummeled by the market yesterday. SolarCity reported solid numbers in the fastest growing space in the market, and the market still didn't like what it saw.
But each of these companies are very different and are on very different trajectories. Here's what we should be taking away from earnings season so far.
Efficiency versus cost
It's easier to cut costs on solar panels than increase efficiency. That's now a certainty after seeing First Solar, once the cost leader, fall so far behind Chinese manufacturers on a cost-per-watt basis, and see SunPower close in the rear-view mirror. That's the core problem for First Solar long term, and one reason I think its module business should be jettisoned as quickly as possible. Don't let the deal with GE fool you; thin-film CdTe solar is dead.
Efficiency will continue to be a key factor for solar manufacturers as costs come down, so look for those who can improve efficiency first to be the winners.
Utility versus residential
The solar boom in the U.S. has really been driven by utility scale solar so far, not residential solar. According to GTM Research, 53% of the solar installed in 2012 was utility scale solar and, with First Solar and SunPower building some of the largest solar plants in the world right now, 2013 will see that trend continue. These projects have also driven profits at these two companies, but utility scale signings are slowing, and they'll soon need to find a replacement.
On the other side of the market, residential solar has been growing steadily since leasing hit the market, and that's where many believe the future of the industry lies. It doesn't appear that utility scale solar will die completely, only that we won't likely see 250 MW plus projects going forward. Instead, 10 MW-50 MW projects will be a sweet spot, and residential solar will take over as the largest percentage of solar installations in the U.S.
Based on First Solar's falling backlog over the past year, it's uncertain if the utility scale business is stable enough to support a major solar player. SunEdison also saw a decline in revenue versus a year ago, although it increased backlog by 119 MW during the quarter. On the flip side, steady demand in residential solar is building stable leasing businesses for SolarCity, SunPower, and private companies like Sunrun and Clean Power Finance.
Until investors can buy into completed solar projects through REITs or MLPs; the growth right now is in residential solar. SunPower and SolarCity are seeing explosive growth in solar leasing, and that momentum doesn't appear to be slowing.
Japan, China, Europe, and the U.S.
Europe was once the home of nearly all solar demand, but the tables have turned in recent years. Japan's installations were up 270% in the first quarter, the U.S. was up 33%, and China announced a plan to install 35 GW of solar by 2015.
Japan and the U.S. will act similarly going forward because a lot of projects are on rooftops of either homes or commercial buildings. SolarCity will benefit domestically as seen by a 144% jump in installations in the second quarter. SunPower and Canadian Solar (NASDAQ: CSIQ ) have seen a huge jump in demand in Japan. Canadian Solar's recently reported numbers show that 35.7% of modules went to Japan, and 28% of SunPower's went there.
These new markets, not Europe, will drive the solar industry's growth over the next few years. Investors will want exposure to companies taking advantage.
Foolish bottom line
Overall, the solar industry is growing, but it's key to understand how it's growing, and how that impacts our investments. The utility scale market is cooling, and so is Europe, but the U.S. and Japan's residential and commercial demand have taken its place. These trend have favored high efficiency, high quality module makers and lease installers. That's what we've seen during earnings season so far.
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