As the solar industry develops into a formidable force to compete with fossil fuels, companies are starting to separate themselves from the pack. And amid an industry dominated by commodity solar manufacturers, First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) are developing differentiation from competitors that should serve them well in the long term. Here's a look at why they're our picks as the perfect stocks for a solar powered future.
The most diverse play in solar
Travis Hoium (SunPower): In the volatile solar industry half the battle is picking investments that will survive the upheaval and end up on top when solar becomes a more mature industry. The only company with a clear technology advantage over competitors and exposure to nearly every major solar market around the world is SunPower.
One of the things we've learned over and over again in solar is that it's easier to lower costs than it is to increase efficiency. So why not invest with the efficiency leader, SunPower, which is 10% ahead of even the closest competitors in the efficiency of its panels?
Efficiency's main advantage in solar is that it allows for more energy generation from a smaller space. It also leverages the non-panel costs like installation, wiring, and permitting that are constant no matter how many panels you install. This gives SunPower an advantage in the residential and commercial solar market.
To top it off, SunPower is 2/3 owned by the oil giant Total (NYSE:TOT). Any solar investor should have bankruptcy as a main concern, but with Total there's a backstop against the company falling too far. Total has shown that it will provide credit and even demand for panels, recently agreeing to buy 200 MW of solar panels to put solar on some 5,000 gas stations around the world.
The overall recipe of high efficiency, a diverse customer base, and a big financial backer make SunPower a perfect stock for a solar-powered future.
Viewing the solar business in a different way
Tyler Crowe (First Solar): I think one major misconception investors have of the solar industry is that it is purely a growth story. When you look at the potential for solar, it's pretty easy to see why. Over the next 25 years, the world will need 8.6 terrawatts of new power generation capacity to fill the needs of the developing world and to replace existing facilities reaching the end of their economic lives -- more than 8x the total generation capacity in the US. Of that need, solar and wind are expected to fill 64%, according to Bloomberg New Energy Finance outlook. Even if solar's share of that pie is smaller than wind's, that's a huge growth runway for the industry.
In reality, though, solar power development and solar panel manufacturing are cyclical businesses that go through constant waves of over- and under-supply. Panel manufacturers perpetually overestimate growth and build out too much production capacity and sap profit margins. On top of that, it's an incredibly competitive market that requires constant reinvestment in the business for manufacturing capacity and improving panel technology.
When you think of solar panel manufacturing more as a cyclical business than as a growth business, then the company that really stands out as a stock worth owning is First Solar. The company maintains a large cash position that gives it the flexibility to invest throughout the business cycle without running into debt or other financing issues, and its returns on all that invested capital have consistently been the best in the business for close to a decade.
Like all other solar stocks. First Solar's shares are going to go through wild swings as investors continue to view this industry through a growth lens instead of a cyclical lens. As a result, investors can now pick up shares at an incredibly cheap price to tangible book value of 0.62 times. If you want to buy into the future of solar, then First Solar needs to be on your list.