This year has been one of the strangest I've seen in the solar industry. At the beginning of 2017, investors were uncertain where demand for solar panels was going to come from and ultimately worried that manufacturers might go bankrupt. By mid-year, it was clear that China was going to prop up the entire market almost on its own, driving panel prices and earnings higher than expected. But the last month has been focused on the solar trade case working its way through the International Trade Commission, potentially killing the U.S. solar industry.
The result has been an up and down year for solar stocks, despite 2017 being much stronger than expected at the start of the year. Right now, stocks are way down as pessimism over trade tariffs has taken over the market's thinking. Long term, I think that presents a buying opportunity for investors because U.S. tariffs would impact a fairly small percentage of the market's sales.
Solar stocks are cheap
The chart below gives a look at how cheap some solar stocks have become. SunPower (NASDAQ:SPWR), Canadian Solar (NASDAQ:CSIQ), and JinkoSolar (NYSE:JKS) all trade for less than 0.4 times sales and First Solar (NASDAQ:FSLR) is below two times sales, despite having nearly half of its market cap in cash.
A price to sales ratio isn't a perfect measure of value, but you can see that three years ago the multiples were at least double what they are now.
One of the reasons multiples have fallen is that margins, in general, are down right now. Companies that entered project development have had margins squeezed as everything from utilities to big oil companies started developing their own projects. Also, oversupply in the solar market has kept panel prices low, although that pressure is currently easing as demand for high-quality panels increases.
Reasons to be optimistic
I think the market's pessimism is misguided in today's solar industry. Demand for solar panels is on the rise and demand is diversifying rapidly. Around 85 gigawatts of solar is expected to be installed globally this year, up from 51 GW in 2015 and just 16 GW in 2010. This is still an industry that's growing like crazy.
The U.S. tariff impact is also being overblown. The U.S. will likely account for less than 15% of global solar installations this year and it's the second biggest solar market to China. It's likely that around a dozen countries will install at least 1 GW of solar in 2018, allowing manufacturers to diversify where they sell, particularly if the U.S. market declines because of tariffs.
Long term, a positive dynamic for manufacturers is that the number of manufacturers with the scale to compete in the market is declining. Weaker players (Renesola, Yingli Green Energy) aren't able to upgrade equipment to stay relevant in today's solar market, leaving less than 10 major solar manufacturers globally. As the industry consolidates, we should see manufacturers be able to differentiate from commodity panels, expanding margins in the process.
The solar market is still booming
About 85 GW of solar will be installed in 2017 and the solar market is still expanding. With fewer major manufacturers and technology starting to differentiate the companies that are left, I think the financial upside for solar stocks is getting better. But the market seems to be thinking the opposite, which is why solar stocks are so cheap right now and why investors may want to take a harder look at these companies for their own portfolio.