What a difference a week makes.
Last Friday, Mister Market looked like it was starting to give up on solar, with earnings season getting under way. First Solar (FSLR 2.17%) shares were down almost 7%, while shares of SolarCity (SCTY.DL), SunPower (SPWR -8.41%), and GT Advanced Technologies (NASDAQ: GTAT) were down between 10% and 16% in the 10 days prior. Here's what these stocks have been up to since:
In less than a week, these companies are up an average of more than 20% each. Did investors who waited (or even worse, chose to sell) miss the boat? Let's take a closer look.
Strong earnings, investing for growth
First Solar and SunPower both reported strong earnings. While SunPower shares initially declined after its estimates for next year included lower earnings than 2013, the share price has rebounded strongly as investors have digested the implications of what will cause next year's earnings decline: heavy investment in its industry-leading efficiency solar cells, in order to meet growing demand. CEO Thomas Lerner, from the earnings call:
CapEx for the fab will be between $185 million and $230 million, and we will fund this expansion through internal cash generation. This plant positions us well for strong growth in 2015 and '16, as we ramp to more than 1.8 gigawatts of annual capacity. While Fab 4 is being built, we plan to increase our existing fab capacity for 2014 by about 10% to more than 1.3 gigawatts, as can be seen in the slide.
From later in the call, to answer an analyst question, he made it specifically clear: "The answer to your question, though, is, for sure, we need a new fab and we will ramp that path aggressively to get meaningful capacity. We need a new fab."
First Solar had a tremendous quarter, beating estimates in revenue and earnings by a wide margin. And while updated guidance for the remainder of the year included a small reduction in net revenue to $3.4-$3.6 billion from $3.6-$3.8 billion, gross margins, operating income, and earnings-per-share were all increased. While SunPower is spending heavily over the next year to add capacity, First Solar still has room to grow in its existing facilities. However, it is making progress to reduce its cost-per-watt manufactured. CFO Mark Widman, from the earnings call:
In the third quarter, we ran our factories at approximately 80% capacity utilization, up five percentage points from the prior quarter. As Jim highlighted earlier on this call, we continue to make great progress toward achieving the efficiency and manufacturing cost target that we have provided during our Analyst Day in April. We have reduced our module manufacturing cost per watt to $0.59 from $0.67 last quarter, an $0.08 per watt or 12% reduction quarter-on-quarter. This is the best quarter-over-quarter cost improvement in six years on a per watt basis and highest percentage reduction since our IPO.
New customers, enormous potential?
GT Advanced Technologies has been touting its Sapphire products for the past several quarters as being very central to the future for the company. And since Apple has featured sapphire lenses in its iPhone since the launch of the iPhone 5 last year, the potential for a partnership has made GT Advanced a compelling company. Needless to say, today's big announcement means Apple agrees. And while the potential losers in this deal point to companies like Corning and its Gorilla Glass, this makes the former GT Solar one of the most interesting plays in the advanced materials space, despite its future involvement in solar, or lack thereof.
While it's not partnering with Apple, SolarCity is growing its business at an enormous rate, with next year's expansion expected to be almost double -- in terms of power generation installed -- versus 2013. But the real big news is the deal to begin using its installed base of solar panels to secure debt, starting with a relatively small $53 million in capital, due in 2026. What makes this so important? As Foolish colleague Travis Hoium describes in the article above, secured debt will mean reduced debt costs, and access to more funding for expansion.
For debt markets to view residential solar installations as viable security for long-term debt is a boon for SolarCity and its peers. We are likely to get more details on this deal, and how management views this as a potential source of capital, on the earnings call on November 6.
Final thoughts: Why it's not too late
I'll leave you with this slide:
Source: IEA
It's hard to understate how important renewables like solar will be to the future of energy, both in North America and worldwide. The planet's population isn't going to get smaller; to the contrary, there will be another billion of us in less than 15 years' time, and hundreds of millions more moving into the energy-hungry middle class. Don't let the recent run-up cause you to miss out on the next twenty years of opportunity.
