Solar stocks had another stellar week ahead of what should be a stellar earnings season. SunPower (SPWR +0.00%), First Solar (FSLR 1.34%), and Canadian Solar (CSIQ 3.73%) were all up more than 10% on the week, and SolarCity (SCTY +0.00%) continued its amazing run, gaining 28%.
SPWR Total Return Price data by YCharts
What's more important than a week's stock movement is that these businesses are improving operations, and on that front it was a good week.
Utility-scale solar is on fire
First Solar had trouble early in the year filling its backlog, but it appears those troubles are in the past. The company agreed to build a 250 MW project for NextEra Energy Resources near the city of Blythe, Calif. The project would soak up more than 10% of First Solar's annual module production, so it's a significant addition for the company.
The 550 MW Desert Sunlight Solar Farm being built by First Solar for NextEra must be going well for the company to order another project. Desert Sunlight sits close to the location for the new project, making Blythe a new hotbed for solar in the United States.
Chinese competitor Canadian Solar began building a 100 MW project in Ontario this week. Canadian Solar was the first Chinese company to move into downstream projects in a big way, and it's one of the reasons the company is in a better financial position than its competitors. This single project will generate about $301.1 million in revenue by the time it's completed in 2015, which is nearly a quarter of the company's entire revenue for 2012.
Utility-scale projects are the profit drivers in solar right now, and First Solar and Canadian Solar are leading the charge.
SunPower gets top quality rating
High-efficiency module maker SunPower isn't the lowest-cost module manufacturer, but it stays competitive by making modules that are more efficient and higher quality than their competitors. On Friday, the company announced that its E20/327 panel achieved the lowest potential induced, or PID, degradation of any panel tested by PV Evolution Labs. You can read more about the test and what it means here.
Here's what really matters for investors. SunPower's PID degradation was less than 0.2%, versus an average degradation of 4%-5% for modules that passed the test. This is just another example of a third-party testing company rating SunPower's panels higher than the competitors, which confirm the company's own claim of having the highest-quality panels in the industry.
Downstream solar is hot
What's really driving solar stocks recently is exposure to the downstream market. SolarCity predicts that it will grow installations up to 90% next year to 525 MW, and investors are looking for exposure to utility-scale projects as well. Those larger projects are how SunPower, First Solar, and Canadian Solar make their money.
As earnings season approaches for these companies, look for those with downstream access to increase profits more quickly than those focused primarily on making and selling modules. Systems are where the margins are, and that's why these four companies were hot this week.
