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Investors in solar could be suffering from whiplash over the past few weeks, with shares of major players like SolarCity (NASDAQ: SCTY ) , First Solar (NASDAQ: FSLR ) , and SunPower (NASDAQ: SPWR ) moving up and down more than 5%-10% or more within a few market days, or in some cases, even just a few hours. After a remarkable 2013, with the three companies up between 89% and 441% YTD, many investors are probably asking one question: Is now the time to take profits, or is there more money to be made? Let's take another look at the bigger picture, and talk about how Trina Solar (NYSE: TSL ) could be a great long-term play.
Massive market opportunity
From Maria van der Hoeven, Executive Director, IEA, July 2013 speech in Rome:
Electricity generation from hydropower, wind, solar, and other renewable sources is projected to scale up by 40% in the next five years. By 2016 global renewable electricity generation will overtake that of gas and represent twice as much as nuclear. And by 2018 the share of renewable electricity will account for a quarter of the global power mix, up from 20% in 2011.
The growing demand for cheap energy worldwide, coupled with increasing fossil fuel costs and lower costs for renewables point toward a bright future for solar as a growing piece of the global energy puzzle.
Why all the ups and downs?
Good question. It's partly a product of earnings season, and a result of so many investors having seen amazing returns thus far in 2013. SunPower alone is up more than 440% as of this writing, while SolarCity is still up more than 330%, even after giving up a good chunk of pre-earnings gains. But what it really comes down to is what investors think the future will look like. And this is where it's very important to realize that SolarCity is a very different business than SunPower and First Solar.
Money today, money tomorrow
First Solar and SunPower primarily manufacture and sell their PV panels and other equipment; SolarCity sells, installs, and maintains systems that are manufactured by third parties, with the vast majority of its sales being in the form of leases with maintenance and support agreements that last 20 years, while First Solar's and SunPower's revenues are primarily a product of selling its manufactured good to the end user, or through its dealer network, with their support and maintenance business units being much smaller.
The challenge for First Solar and SunPower, when it comes to SolarCity, may be that SolarCity doesn't use either company's panels in its installations, primarily working with Chinese panel maker Trina Solar, according to one SolarCity sales representative I've met with. Trina Solar is an interesting company to look at, as a comparison to domestic competitors like SunPower and First Solar.
First, there's the fallout of the Chinese government's heavy subsidies of the country's solar industry, which nearly crippled the U.S. solar manufacturing business over the past couple of years. The effects of this action left a bad taste in many investors' mouths after being burned as a result of a foreign government's actions in the market. Add in that Trina Solar is still losing money, and there's plenty of reason to stay away.
However, the company recently raised guidance on both panels shipped and gross margin. This bodes well for the future if these continue to trend higher, and lead to profitability.
And profitability is still the key
Which brings us back to SunPower, First Solar, and (at least recently) SolarCity:
This quarter, SolarCity, SunPower and First Solar all reported positive earnings per share, and SunPower and First Solar are projecting profitability moving forward even as they invest those profits in growth. SolarCity, on the other hand, is guiding to a (non-GAAP) loss in Q4 of more than 55 cents per share; however, management is telling us it will be net cash-flow positive. For a company investing in such incredible growth, seeing positive cash flow is, well, very positive for investors.
Trina is more of an unknown, and certainly a speculative bet versus its domestic competitors. We will get a better idea of its progress November 19 when it announces earnings. It would be good to see several quarters of profitability before taking a bite, however; as a manufacturer, Trina must be able to leverage its scale to be a worthwhile investment.
I'll leave you with a quote from SolarCity CEO Lyndon Rive:
We now have $1.7 billion of nominal contract payments coming to SolarCity. I will first spend a little bit on this. If you look at 2011, there was $500 million. 2012, a little over $1 billion and now at $1.7 billion, and when you are at this growth rate and you double small numbers, eventually small numbers become big numbers. So at this rate we should get really close to our $2 billion number by the end of the year.
Albert Einstein supposedly said that compounding interest is the most powerful force in the universe. For investors in SolarCity, this could be the case, as each long-term agreement adds more long-term value to the company's results. The stock may look expensive, but dig a little deeper before selling now, or dismissing it as a potential investment.
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