Which of These 3 Solar Companies Can Make You Rich?

Solar stocks such as First Solar, SolarCity and SunPower have been some of best performing stocks of the last 18 months. This article takes a look at these three popular solar companies and tries to determine which, if any, can make long-term investors rich.

Jul 8, 2014 at 2:08PM

Editor's note: A previous version of this article overstated the efficiency of First Solar and SolarCity panels. The Fool regrets the error.

SCTY Chart
SCTY data by YCharts

Solar stocks such as First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), and SolarCity (NASDAQ:SCTY) have been some of the hottest stocks of the last 18 months.

With a market potential of $2.2 trillion and the International Energy Agency estimating that $2.55 trillion/year will need to be spent on total energy and efficiency infrastructure through 2035, one can understand why Wall Street has fallen in love with these companies. 

However, at The Motley Fool we believe in a long-term buy and hold strategy of great companies with strong growth prospects. This article will look at these three solar companies and attempt to answer the question: Can long-term investors still make money at these prices?

First Solar: profitable but too big to grow
First Solar is the largest solar company by market cap and production capacity, shipping 2.7 gigawatts (GW) of solar panels last year and guiding for 2.8 GW in 2014.

There are three main problems First Solar faces: its large size, inferior technology, and share dilution. 

First Solar has just secured financing to build the largest solar project in Latin America, the Luz del Norte power plant in Chile, which will be 141 MW. In 2013 Chile's economy grew at 4.1% and it faces the challenge of expensive electricity. Its government has set a goal of 20% solar power generation by 2025 to help the economy grow while lowering power costs and cutting carbon emissions. The reason for such a bold goal? Chile is blessed with some of the best solar potential on earth with its Atakama desert experiencing the highest solar radiation levels on earth. First Solar won the contract because it uses Cadmium thin-film panels which handle extremes of temperature better than silicon panels. 

But if First Solar is doing so well in a promising market like Chile, then why the negative earnings growth projections? The answer lies in scale. The Luz del Norte project is 141 MW, representing strong growth for Chile's solar industry, which installed just 150 MW in 2013. 

However, given First Solar's massive scale, even a couple hundred MW won't move the needle and First Solar's thin-film panels are only 13.5% efficient compared to 21-23% for SunPower panels and 15-17% for SolarCity's panels.

Chile's extreme climate may call for thin-film panels, but the majority of the world cares more about efficiency, which directly affects cost.

Finally, First Solar, like SunPower and SolarCity, faces the problem of large share dilution. 

FSLR Revenue (Annual) Chart
FSLR Revenue (Annual) data by YCharts

As seen above, all three companies have high annual dilution rates:

  • First Solar: 9.7% 
  • SunPower: 6.3% 
  • SolarCity: 13.8%
With First Solar's revenue growth stalling due to its large size and inferior technology, the company's high dilution and slowing growth means the share price will struggle to grow over the next decade.
SolarCity: great company, bad investment 
SolarCity has a wonderful long-term business model. It installs solar systems on homes and businesses at no cost to owners, who sign a 20-year contract to pay for the electricity generated. SolarCity is growing like a weed on steroids, guiding for 70% CAGR customer growth through 2018. 
How can I be opposed to such an investment? For two reasons: escalating costs and share dilution.
The US recently imposed steep tariffs on Chinese imported solar panels, which SolarCity was using for its systems.
In response SolarCity spent $200 million to purchase panel maker Silevo, which is working on panels with 24% cell efficiency that would reduce the amount of panels needed by 25% and greatly cut costs.
So what's the problem? SolarCity is guiding for 1,400 MW to 1,650 MW of installations through 2015 yet Silevo's manufacturing capabilities are just 32 MW annually. 
With just $320 million in cash, a potential extra $150 million payment to Silevo and $734 million in expected losses through 2015, SolarCity likely won't be able to increase Silevo's production or achieve its growth goals without raising substantial amounts of additional capital. In fact, SolarCity has stated that it intends to invest $500 million into expanding Silevo's capacity to 1 GW within the next two years. With $710 million in current debt
my concern is that SolarCity will accelerate its share dilution rate in order to raise these sums. Given its already high valuation of 32 times sales, accelerating dilution will slow eventual earnings growth (once SolarCity is profitable) and act as a drag on long-term performance.
SunPower: profitable best of breed
SunPower is the best solar company investors can own for three reasons: its superior technology and its distributed generation business gives it a strong growth catalyst. 
SunPower's has tested panels with pre-production cell efficiency of 25% and that are five times more reliable than its competitors' products, delivering 75% more power over a 25-year period.
SunPower is also leasing private solar power systems under long-term contracts. By 2015 it estimates it will have doubled its customer base to 300,000 and more than tripled its contracted cash flows relative to 2012.
Foolish bottom line 
First Solar, SolarCity, and SunPower will all grow their businesses in the next decade. However, SunPower, with its superior technology, strong growth catalyst, and minimal dilution, is likely to result in the best long-term returns. SolarCity is an innovative company with a terrific business model and strong growth ahead of it, but massive shareholder dilution is likely to slow long-term share appreciation. Meanwhile, First Solar will continue to struggle to win contracts and grow sales unless it can greatly improve the efficiency of its panels to match its competitors. 

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!


Adam Galas has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information