Deutsche Bank recently affirmed its bullish views on the solar industry. The German bank expects the global demand for solar power to grow by about 31.4% in 2014 and 21.7% in 2015. Plus, the bank estimates that photovoltaic wafer prices will appreciate by 20% during 2014. In light of this expected growth, where should you invest? Let's find out.
I believe First Solar (NASDAQ:FSLR) is a prime beneficiary here. In addition to manufacturing solar modules, the company takes up installation and maintenance contracts for utility-scale solar projects across the globe. Its diversified business model, in turn, results in balanced growth.
Investors should note that First Solar's PV panels currently lag its peers in terms of average conversion efficiency -- about 13.4% as opposed to 20% of high-end panels from other manufacturers. But its low operational efficiency keeps the cost-per-watt in check, thereby boosting the economic feasibility of utility-scale solar projects.
In its recently released product roadmap, management noted that the conversion efficiency of its Cd-Te technology would increase 25% by 2016. This, in turn, will boost its systemwide conversion efficiency to 16.2% in 2015 and 19.5% in 2017. More importantly, manufacturing costs will remain constant.
This will enable utility-scale installations to reach their break-even period relatively sooner, thereby boosting First Solar's competitiveness. Plus, the company can enter the retail installation market and further propel its top-line growth.
SunPower (NASDAQ:SPWR) is another formidable solar player. The company is involved in the manufacturing of solar panels, and their installation in residential as well as commercial space.
Residential and commercial areas, which are generally cramped for space, require highly efficient panels capable of generating electricity in the minimum area possible. First Solar's panels can't be installed in such areas due to their relatively lower conversion efficiencies. SunPower, however, offers a practical solution to this problem.
SunPower manufactures the industry's most efficient solar panels – its average conversion efficiency reaches up to a record 20%. As a trade-off for quality, its cost-per-watt is about 69% higher than First Solar's. In spite of the initial high costs, SunPower has managed to double its revenue over the last five years.
Evidently, there is a healthy market for highly efficient solar modules, and SunPower should continue to grow swiftly with the surging global demand for solar power.
A relatively safer investment?
SolarCity (NASDAQ:SCTY.DL), on the other hand, is only involved in the leasing of retail and commercial scale solar panels. So while SunPower and First Solar benefit from the expected increase in PV module prices, SolarCity won't benefit at all. Its revenue stream is largely tied to domestic project installations.
The absence of a manufacturing division nevertheless reduces SolarCity's operational risks. Over recent months, solar manufacturers around the globe came under pressure as subsidized China-made solar panels intensified market competition. SolarCity, however, came out unscathed since its operations only involve panel leasing.
Moreover, the leasing business further reduces the volatility in SolarCity's operating cash flows. Once the panels are installed, end-users pay the amount due in predetermined installments. These recurring payments, in turn, enable the company to ramp up its capital expenditure in a balanced and consistent manner over the years.
With leasing options increasing the affordability of its installations while securing operating cash flows for the future, I believe SolarCity offers robust growth prospects while incurring minimal risks.
Foolish final thoughts
Owing to market speculation and varied panel supply, shares of solar companies have been volatile over the recent months. Therefore, risk-averse investors might want to hedge their risks and rewards by investing in the above-mentioned companies. Where SunPower and First Solar result in balanced growth, SolarCity – being a pure-play – can deliver exceptional returns over the coming years.
Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.