First Solar's (NASDAQ:FSLR) earnings results last week gave investors a peek at what the solar industry will look like for the next few years. And while we don't yet have the company's 2017 guidance, we know that bookings so far this year have been just 1.6 GW, worth $1.1 billion, and that 2017 projects under contract are 494 MW, well below 3.2 GW of capacity.
What's clear is that there's a lot of pressure ahead in utility-scale solar, where First Solar generates most of its business. But it doesn't tell us a lot about what solar giants like SunPower (NASDAQ:SPWR) and Canadian Solar (NASDAQ:CSIQ) may be doing to adapt to these new realities.
There's more to solar than utility-scale projects
What's disturbing about First Solar's results is that they indicate a highly competitive environment in large-scale solar projects, in which companies will be fighting for a share of a shrinking market in 2017. Since First Solar, SunPower, and Canadian Solar all have large utility-scale development arms that have driven their profits for the last few years, there will likely be a big decline in revenue and earnings next year.
Canadian Solar will be hit by this weak utility demand, and may be hurt even more by plunging solar panel prices. Early in 2016, solar panels were selling for $0.55 per watt; by September, the price had plunged to $0.40 per watt. That'll squeeze margins, and since Canadian Solar's products don't have much differentiation from those of its competitors, it'll have to lower prices along with the industry. But it does have the ability to sell panels to commercial and residential developers, and that could bring demand from parts of the market First Solar doesn't see.
This residential and commercial demand could also help SunPower in late 2016 and into 2017. The company is making a clear transition to selling most of its high-efficiency solar panels into small-scale solar projects where efficiency can leverage the cost of installation, permitting, and other balance-of-system expenses. In large projects, these expenses don't account for as large a percentage of the total cost, so efficiency matters less.
While First Solar's results likely foreshadow weak demand coming from SunPower's utility solar business, management says about half of its demand is from residential and commercial projects. So, that's what investors should have their eyes on when earnings come out Wednesday.
In 2018, the game changes
What's crazy in utility-scale solar is that demand can rise and fall very quickly. Next year, it's going to be weak, in part, because of when the extension of the solar investment tax credit was passed. When companies expected the credit would lapse, they were less inclined to plan new installations, creating a gap in 2017 that will be followed by a big boost in demand starting in 2018.
First Solar says it has 629 MW of projects booked already for completion in 2018, more than 2017. And with bidding for projects in 2018 and 2019 heating up, the backlog could continue to grow.
What investors will want to watch for is solar companies finding a bridge over the slow demand in 2017 so they can reap the rewards of growth in 2018 and beyond. First Solar is building its bridge with a strong balance sheet, SunPower will use commercial and residential solar, and Canadian Solar may just try to squeeze weaker competitors out of the market.
For all three, 2018 is when the big payoff for investors will show up. Companies that can survive with a good balance sheet and a diverse business will be winners in the booming solar industry long term.