As 2015 begins, the market is viewing the solar industry with a skeptical eye. Solar stocks have been beaten up as oil prices have dropped, but the reality is that there are few places in the world where solar and oil compete directly, so the sell-off isn't really warranted.
In fact, the foundation of the solar industry has only gotten stronger in the last twelve months, with solar costs falling to below grid parity in many sun-soaked locations and massive growth in distributed solar projects on residential and commercial rooftops. For investors willing to ride out the storm, now is a great time to own solar stocks.
Growth in solar has just begun
A recent report from IHS Solar predicts that the global solar market will grow 16% to 25% in 2015 to 53-57 GW. Within the U.S., the solar industry grew 36% in 2014 to 6.5 GW, and GTM Research expects growth in 2015 to be about 26% to 8.2 GW. No matter how you slice it, the industry is in for healthy growth this year.
What's exciting is that certain segments of the market are expected to gain more traction as the industry develops. Concentrated solar is expected to grow double digit percentages through 2020, highlighted by growth in the low concentration PV market. These are products like SunPower's (NASDAQ:SPWR) C7 and future C12 products (shown on the right) that use mirrors to concentrate the sun's rays on a solar cell.
Distributed solar is also expected to continue its impressive growth in 2015 and beyond. These are solar systems put on residential and commercia rooftops, totaling 100 kW in size and smaller. HIS Solar expects this segment to be 30% of global installations next year, or 15.7 GW. The most concentrated is Japan, where 70% of the market is these small systems, while the U.S. will install 2.2 GW of distributed solar in 2015.
Solar with storage is also becoming viable around the world, and IHS predicts this segment will triple this year to 775 MW. SunPower and SolarCity (NASDAQ:SCTY.DL) are leading the energy storage market in the U.S. and will drive the adoption of solar plus storage for residential customers. This solution could help negate the tension with utility off-take policies like net metering, which compensates solar owners at their usage rate for electricity sent back to the grid.
Companies developing a leading position in solar will be able to grow into this market and capture the trillions of dollars of potential value. But differentiating oneself will be key.
Differentiation is starting to be big in solar
As the solar industry evolves, companies are having to differentiate themselves from competitors. It's no longer good enough to make commodity solar panels or simply be an installer -- you have to find ways to add value through technology or multiple product offerings.
SolarCity is separating itself from competitors in the residential market by building a cost structure low enough to install solar for less than $3 per watt. It's augmenting that with both lease and finance offerings and adding high efficiency module manufacturing in the next few years as well as energy storage.
SunPower makes the world's most efficient solar panels, and has led the charge into both energy storage and low concentration PV. As the industry has evolved, it has become apparent that efficiency will drive cost reductions, and when you're starting from the industry's leading position in efficiency you can command higher margins than competitors, which has kept SunPower profitable.
SunEdison (NASDAQOTH:SUNEQ) has the potential to grow fastest among solar installers, signing a 5 GW memorandum of understanding in India. But it also uses commodity solar panels, and has been reporting net losses for years now. This is one major player that has yet to find a differentiation, so it's unknown where the company's place is in the future of solar.
Even small shifts in the marketplace will lead to big changes in both revenue and profit growth for solar companies competing in this growing industry. Broadly, I think the solar sell-off caused by falling oil prices gives investors incredible value right now. But I also think SunPower is going to capture more value than competitors in the future, and SolarCity has a chance to do the same if it can improve its panel technology. The tide is rising for all solar stocks, but these two have a better change of staying afloat than competitors.
Travis Hoium owns shares of SunPower. 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.