SunEdison (SUNE +0.00%) and Abengoa (NASDAQ: ABGB), two big players in the solar industry, are both nearing bankruptcy. As established as solar has become as a viable source of energy, the sector still looks far from stable from an investor's standpoint.
In this segment from the MarketFoolery podcast, Chris Hill and David Kretzmann talk about what it means for the industry that so many big companies in it are doing so poorly, and how investors can buy into solar without adding too much risk to their portfolios. Then, they take a look at how Tesla Motors (TSLA +0.80%) is working its way into the sector, and what effect its moves could have on utilities as a whole.
A full transcript follows the video.
This podcast was recorded on April 6, 2016.
Chris Hill: @MarketFoolery is our Twitter handle. From Thabo Hermanus in South Africa, who very nicely tweeted a story from The Economist titled "Blinded by the Light," and the subtitle is "Two Big Potential Bankruptcies Cast a Shadow Over the Solar Landscape." We touched on one of these companies in a recent episode, and that's SunEdison, and the other is Abengoa, which is a renewable engineering firm in Spain. And I'm curious because I know that the solar power industry is one that you watch.
As an industry, it's had a pretty nice run, I would say, for the last five to eight, 10 years, in terms of not just results, but growing acceptance. Certainly some of the stocks have had good runs. And I think that, for whatever questions existed about the viability of solar power before, say, 2005, I think you'd be hard-pressed to find a lot of people saying, "No, there's no viability." Solar power as a viable power option, as a viable way to invest, I think those questions have been answered.
That said, these are two large companies that are on the verge of completely collapsing. And I'm wondering, when you look at a story like this, do you look at this and think, "Well, that's them, that's not the industry as a whole?" Or do you think part of this story includes a cautionary tale for investors?
David Kretzmann: I think it's worth being cautious here. As we talked about with Tesla, similar to that story, these are companies that are burning through cash, and they have a good amount of debt. Any time you have a scenario like that, there is higher risk for investors, because these are companies that are dependent on issuing stock, they're dependent on borrowing money to finance the business, and they're plowing through cash at a very rapid rate. So, SunEdison, as an example, their operating cash flow last year for the past 12 months, negative $1.4 billion. Capital expenditures of $3 billion. That shows you, they're burning almost $4.5 billion in cash each year. They have a net debt position of nearly $8 billion.
So, just taking a quick look at the balance sheet and the cash flow statement, you can get a sense for the position a company is in. SunEdison would not be able to operate their business without borrowing money. That just, in and of itself, increases your risk as an investor. So, I think when you're looking at a very promising and rule-breaking type of industry like solar, there's a big mass of movement just consumer-wise and industry-wise. When it comes to renewable energies like solar, you want to size any investment in your portfolio accordingly, especially when it's these earlier-stage or capital-intensive-stage-type companies like SunEdison.
And this goes for even a company like SolarCity (SCTY +0.00%), which is probably the most widely followed solar company here at The Fool, as we've seen with the performance of that stock over the last year, for one, it's going to be volatile. And when market sentiment changes for the worse, there isn't a whole lot of a bottom on the stock, because there's no earnings, there's a huge amount of debt, no positive cash flow, they're burning through cash as a business. So, you just have to recognize that these are riskier companies. Certainly, when you're thinking in terms of the potential of bankruptcy happening, it's higher with these kinds of companies. And the share prices will be more volatile.
Of course, it is company to company. SunEdison tends to invest more in solar farms, so closer to the traditional utility model of generating electricity, whereas you have companies like Vivint Solar and SolarCity, which tend to be focused and concentrated on rooftop solar. Which, to me, actually, makes a little bit more sense, just because you can use existing real estate to produce solar with the rooftop solar model. You just stick it on the top of the roof and you're good to go.
And Tesla actually also has a dog in this fight as well, with the Gigafactory, which we talked about. As these lithium-ion batteries become more and more affordable and more and more mass-produced, potentially, it could even cut out the traditional utilities. You won't even have to plug into the existing utilities as we know them today. You could just have your own battery pack with your house that can store any excess electricity generated by the solar panels.
SolarCity has mentioned that they think every solar system that they install, at this point, within the next eight to 10 years, will have a battery pack installed. So, each house that gets that solar system would have a battery pack. Whether or not SolarCity is able to last as a business until then is another question. Whether or not that actually happens is another one. But that certainly is the direction that some visionary people in this industry see the solar industry heading, whether you're talking about Elon Musk or his cousins, the Rive brothers.
It's a fascinating industry, but definitely try to tread with caution here. I wouldn't make investments in solar in an oversized position in a portfolio. It's going to be a very volatile industry. But, on the plus side, even if you just have a small position in some of these companies like SolarCity, a small position is really all you need. If solar takes off, or a company like SolarCity takes off in the way that a lot of us at The Fool expect it to over a period of 10-plus years, a small position is all you need. You don't need to load up on one of these companies to be rewarded as an investor.
Hill: Don't back up the truck on SunEdison. (laughs)
Kretzmann: No. Any company that's burning through cash at this rate... invest a smaller amount.
