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Are Solar Stocks Due for Another Fall?

By Eric Jhonsa – Updated Apr 6, 2017 at 1:13PM

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Overinvestment and Europe's economic problems could soon spell trouble for them.

From an investor's standpoint, maybe the best thing about an industry like solar is also the worst thing: It's young and rapidly changing. While this means that big returns can be had over the long haul if you pick up the right names at reasonable prices, it also means that investors are bound to suffer the industry's growing pains as the winners get sorted from the losers, and companies learn how to manage downturns the hard way. The latter problem reared its ugly head during the first brutal months of the recession, and I think it's due to return during the second half of this year.

Earnings look good
At first glance, this might seem a strange time to get nervous about the outlook for solar stocks -- even if only for the near term. The latest round of earnings reports delivered by solar cell and module manufacturers were far from terrible. Thin-film module giant First Solar (Nasdaq: FSLR) knocked the cover off the ball, delivering stellar first-quarter results and providing 2010 earnings guidance well above Wall Street forecasts. Chinese manufacturers JA Solar (Nasdaq: JASO) and LDK Solar (NYSE: LDK) also provided earnings and guidance that blew away market expectations, and Suntech Power (NYSE: STP) pre-announced first-quarter numbers that did the same. Among big solar names, only SunPower's (Nasdaq: SPWRA) numbers proved disappointing.

And not only has demand picked up for the industry, pricing is finally stabilizing after being in a free fall for much of the recession. That's a mixed blessing for cell and module manufacturers, because it has also translated into stronger prices for the silicon wafers made by the likes of MEMC (NYSE: WFR), which make up their largest component cost. But it's still a clear sign that business has finally stabilized.

Overcapacity and euro woes
So why the concern about the industry hitting another rough patch? Well, it has a lot to do with the industry's newfound optimism about a recovery leading it to move too fast, too soon. The earnings calls of cell and module manufacturers were littered with announcements about plans to grow capacity to meet rising demand. First Solar raised its 2010 capital spending forecast from a range of $500 million to $550 million to one of $625 million to $650 million. LDK Solar stated that it now expects to more than double its module manufacturing capacity by the end of the year. And JA Solar boosted its 2010 capital spending guidance from $130 million to a range of $220 million to $250 million.

All of this might be good news for Applied Materials (Nasdaq: AMAT), whose solar manufacturing equipment business could use a boost, but it once again raises the specter of a major capacity glut, leading to crashing prices and dwindling gross margins. It sure doesn't help that all of this expansion comes at a time when the industry is bracing for a major cut in German solar subsidies. Or that solar manufacturers are still very dependent on demand from Europe in general. As we know, that continent is looking pretty shaky economically, and the combination of a credit crunch, government spending cuts, and a plunging euro (which makes imports more expensive for Europeans) could especially hurt an industry like solar.

The semiconductor industry went through some ugly boom-bust cycles in its early days on account of manufacturers getting carried away while times were good. It looks like the solar industry isn't finished learning its own lessons about how to manage industry cycles, and that spells trouble for solar stocks during the second half of 2010.

Fool contributor Eric Jhonsa doesn't own a position in any of the companies mentioned. First Solar and Suntech Power Holdings are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.

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Stocks Mentioned

First Solar, Inc. Stock Quote
First Solar, Inc.
FSLR
$129.85 (-1.46%) $-1.92
Applied Materials, Inc. Stock Quote
Applied Materials, Inc.
AMAT
$84.29 (-0.88%) $0.75
SunEdison, Inc. Stock Quote
SunEdison, Inc.
SUNEQ

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