What’s Next for Solar Stocks?

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In his recent State of the Union address, President Obama cited the importance of solar power in America's energy strategy. Solar panels manufacturers such as First Solar (NASDAQ: FSLR  ) and SunPower  (NASDAQ: SPWR  ) are likely to benefit from the White House's support. So how does this affect the current outlook for the solar industry? And, outside the U.S., where will growth come from in 2014?  

Will the sun keep shining for manufacturers?
According to the Energy Information Administration's estimates, U.S. solar consumption will rise by more than 35% in 2014, year over year. In comparison, during 2013 solar energy consumption rose by 32%. Despite these high growth numbers, not all solar panels manufacturers showed such production growth in recent quarters: During the third quarter, First Solar's megawatts produced dropped by 13%. Nonetheless, the company's revenue spiked by 51% year over year, mainly due to sales of its ABW projects in Canada to an investment partnership led by GE and recognized revenue from its Desert Sunlight project in the Mojave Desert.

Conversely, SunPower's megawatts produced jumped by 38%, but its net sales increased by only 1.3%. Therefore, even though the solar power industry is expected to boom in 2014, it won't necessarily be reflected in revenue growth for these companies. Looking forward, the efficiency of solar panels and their costs will be a bigger factor in determining revenue. 

Lower cost and better efficiency
The conversion efficiency ratio of solar cells is likely to determine much of the demand for solar panels. In the past year, First Solar was able to improve this number from 12.7% in the third quarter of 2012 to 13.3% in the third quarter of 2013. At the same time, the company has also made great strides in reducing its cost per watt produced from $0.67 to $0.59 in the third quarter of 2013. These improvements make First Solar a stronger competitor compared to its peers. With that said, SunPower does offer solar panels with higher conversion efficiency ratios than First Solar. SunPower has also cut its costs: The company's sales cost fell by 18% in the third quarter of 2013, and its gross profitability sharply increased by nearly 12 percentage points to 29%. 

In addition to improved solar panels at lower costs, these companies are likely to keep growing outside the U.S., mainly in Asia.  

Big in Asia
The rise in demand for solar energy in Asia, especially China and Japan, will sustain the growth of these companies in the coming years. In this respect, SunPower's revenue in Asia-Pacific jumped by 62% year over year in the third quarter. This region still accounts for a small fraction of the company's revenue -- only 14% out of total revenue. Since the region is the most profitable, however, at over 39% (gross profitability), the company is likely to keep increasing its reach there.

SunPower recently signed an agreement with Ecomax to supply 20 megawatts in Japan. First Solar is also growing its business in Asia, announcing back in November 2013 that it would invest $100 million in Japan. The company also started to construct a solar project in Kitakyushu-shi, Japan. This project, which will generate 1.4 megawatts, will become operational during the first quarter of 2014. 

Bottom line
The demand for solar power is likely to sharply rise in the coming years in the U.S. Solar manufacturers will have to further improve their panels and reduce costs in order to remain competitive. These improvements will also help them extend their reach in Asia, which is likely to be among the main regions of growth in the near future. 

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Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

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