Image: First Solar.
The solar industry is slowly but steadily revolutionizing everything we know about energy. It's making energy production at home possible, allowing businesses to utilize previously untapped rooftop space to lower costs, and even making it possible to power impoverished regions without grid access around the world.
In the last decade, the industry has gone from a pipedream to a significant player in energy and the growth isn't close to stopping.
Source: GTM Research.
But for all the success the solar industry has had building projects it's still a wasteland of failed companies. Solyndra, Evergreen Solar, Energy Conversion Devices, Q-Cells, and Suntech Power are just a few of the names that were once hot for investors but flamed out in dramatic fashion.
One problem in solar is that too many investors look for growth when they should be looking for companies building a profitable business on a solid balance sheet. But that's a boring way to look at solar, so investors tend to overlook the companies that are building solar companies the "right way" on fundamentals. Here's why mundane aspects like balance sheets and income statements shouldn't go overlooked.
Growth is a red herring
One thing a lot of investors look for in solar energy is growth, particularly in yieldcos. Growth is great, but you have to ask what that growth is worth? If you're growing unprofitably and adding debt in the process then you're on a slippery slope to bankruptcy, as the companies above can attest.
Today, I'd like to look at four companies who have taken very different approaches to growth and debt in the past decade with differing results. Yingli Green Energy added billions of dollars in debt (mostly short-term) to pay for manufacturing expansion through 2012. The result was that it became the biggest solar manufacturer in the world, but like the company that previously held that title (Suntech Power) Yingli Green Energy is now teetering on the brink of collapse.
SunEdison (SUNEQ), who is a favorite of hedge funds because of its growth, has added billions in debt in the last year alone, all in an effort to expand. It's now the largest renewable energy developer in the world, but it is losing hundreds of millions of dollars quarter after quarter. It's a market darling today but will that last? And can SunEdison ever turn a profit with over $9 billion in debt?
Meanwhile, First Solar (FSLR -1.55%) and SunPower (SPWR -2.12%) have been quietly maintaining stable balance sheets and developing differentiated technology that gives them a competitive advantage long-term. They haven't been growing, but they've been biding their time as others rise and fall around them. Quietly, they're building companies that are built to last in solar energy and it's no coincidence that they combined to form the 8point3 Energy Partners yieldco recently.
SUNE Total Long Term Debt (Quarterly) data by YCharts
Given the debt picture I outlined above, it may surprise you to find out that Yingli Green Energy and SunEdison are the only two of these four companies who are losing money. Yes, they're sitting on billions of dollars in debt and they can't even make a profit. Meanwhile, SunPower and First Solar, despite storing projects on their balance sheets in the past year, are making money and will likely continue to for the foreseeable future.
SUNE Net Income (TTM) data by YCharts
I'll note that in the case of SunEdison the net income figure doesn't tell the whole story because it recorded losses on its silicon business and its consolidation of TerraForm Power (NASDAQ: TERP) doesn't allow for instant revenue recognition when projects are pushed down to the yieldco, but the losses on top of the debt load should be alarming nonetheless.
Another way to frame SunEdison's business would be through cash flow from operations and even that doesn't look good either. That's why management and investors talk about growth. Because there aren't profits to point to.
SUNE Cash from Operations (Annual) data by YCharts
Why these charts are dangerous for investors
Long-term, solar energy should be a business that companies can make money in and that's the problem I see with too many solar companies today. They lose money in an effort to grow without a plan to turn a profit long-term. It's a strategy taken by many companies before in solar and many of those companies eventually went bankrupt.
Companies like SunEdison are already working with razor thin margins and as the cost of panels and systems fall there will be even less margin from revenue to pay for debt and if interest rates rise debt problems could be exacerbated. Growth might be a sexy topic for investors, particularly in solar, but if you're relying on debt to fund your operations there's a risk that debt markets will eventually cut you off. That's what happened to Suntech Power, Solyndra, Evergreen Solar, and many others.
Be careful what you with for in solar. Before thinking that the latest hot growth stock is the best investment keep in mind that eventually companies have to make money. The companies who have lasted long-term -- First Solar and SunPower -- may not be growth phenoms but they're profitable. That's something everyone should grow to appreciate in solar energy.
