Image: SunPower.
The solar industry saw some shocks to its system-- to say the least -- after the industry's big three reported earnings. Shares of SunPower (SPWR -1.70%) and First Solar (FSLR -1.43%) surged on big earnings beats and improving guidance, while SolarCity (SCTY.DL) fell flat on its face after posting a bigger than expected loss and lowering installation guidance.
SPWR Price data by YCharts
These short-term stock movements can be dramatic -- and more than in any earnings season in recent memory, we're seeing the long-term strategies of these three play out in both positive and negative results.
Slow and steady wins the race
If there's one thing that we've learned about the solar industry in 2015 it's that the days of massive growth and promises of profits someday in the future are over. Investors want to see profits and cash flow now.
If there's one thing that got SolarCity and SunEdison (SUNEQ) in trouble, it was that they bet big on growth without meaningful proof that they could make money on that growth, meaning they weren't profitable or cash flow positive. They're reliant on a variety of sources of financing, from tax equity to asset-backed securities to yieldcos, to maintain growth, and they build on the thesis that there's a payoff at the end of the rainbow. But that story only works for companies as long as investors believe it.
This year, investors have started to question just how much money SunEdison and SolarCity will make in the future, highlighted by Jim Chanos' high profile short call on SolarCity earlier this year. Confidence fell regarding the companies' abilities to fulfill their value promises, and stocks began to fall. This week SolarCity confirmed some of those fears by reporting a massive increase in sales costs and a pivot in strategy to slower growth and more cash flow generation. I think slower growth is the right strategy, but it was a shock for investors to hear from a company that's always been about growth.
Both SolarCity and SunEdison recently announced strategy shifts that will turn them from growth stocks to more stable energy companies. Ironically, this is a strategy both First Solar and SunPower have been employing for years, which has led to the strong performance we've seen from both recently.
FSLR Net Income (TTM) data by YCharts
With First Solar and SunPower expecting even more cash in the coming months from dropping projects down to their yieldco, 8point3 Energy Partners, it looks like they're way ahead of SolarCity and SunEdison in proving long-term value, which is what the market now wants.
Differentiation matters
One of the things I've harped on in is that differentiation matters, especially when it comes to system efficiency. We're seeing that play out now, with the most efficient panel maker in the world (SunPower) and the best large system builder with rapidly improving efficiency (First Solar) reporting better than expected profits and increasing their expectations for the future.
For the last few years it was OK to buy commodity panels from China and install them as fast as you could with new financing models. That's what SolarCity did, and what SunEdison projected with its rapid growth plans. But commodity products don't provide good margins in a competitive business, and that's caught up to both companies recently.
Long-term, differentiation will result in higher margins and better growth for solar companies. The market is starting to realize that First Solar and SunPower are the two that offer that to investors.
The tables have turned
Cost and scale aren't the only things that matter in the solar industry, and that's starting to play out in solar stocks. SunPower and First Solar are two of the slowest growing companies in the industry, but they're two of the most profitable with differentiated products. That's paying off, with both stocks moving higher as investors start to see that making money is more important than growth for growth's sake.
Interestingly, as SunEdison and SolarCity are ratcheting down growth plans I think we're going to start to see SunPower and First Solar ratchet up theirs. Both can leverage the money they make off projects with investments in growth like energy storage, better technology, and expanding capacity.
The tables have turned in solar, and SunPower and First Solar are proving their value to investors. Competitors are going to have a hard time catching up.
