November 14, 2017    5 minute read

Is the Sun Shining on Solar Stocks?

Why Are Investors Not Yet Enthused?    November 14, 2017    5 minute read

Is the Sun Shining on Solar Stocks?

Solar stocks haven’t had a good few years, which has been reflected by their lower than expected returns to investors in the past 24 months or so. However, as ever, there must be a turning point in sight and it could well be imminent.

This year, over 100 GW of solar capacity is predicted to be installed globally, which is a big chunk considering that according to the International Energy Agency, there was only around 300 GW of installed capacity at the end of 2016. This level of growth is therefore obviously unprecedented in the industry, which can only spell good news for the companies at the front of the pack. With the added benefits of “Swanson’s Law”, which observes that the price of photovoltaic modules (otherwise known as solar panels) drops around 20% for every doubling of installed volume, the emerging opportunities and possibilities are nothing short of exciting.

Source: Bloomberg New Energy Finance

Costs Coming Down

The cost of solar energy has reduced exponentially in recent years and is now as close as it’s ever been to grid parity. Although this is a very complex comparison, the Levelised Cost of Energy (LCOE) is the ‘fairest’ and most widely used method for comparing different energy technologies. (The calculation measures lifetime costs of energy production by source divided by total energy production, resulting in the present value of a unit of energy from any source).

Both current and forecasted LCOE prices point towards solar panels being as affordable, if not more affordable, than new coal and gas. Although achieving parity with existing energy generation techniques is aiming at a moving target, there is a general consensus that renewables – and especially solar in many regions – is already a strong contender. Although the LCOE is not globally below that of retail grid energy, adoption is already booming.

With the decrease of solar panel costs continuing year on year, one has to expect a point at which the scales tip in favour of the solar giants. This tipping point has arguably already been seen in Saudi Arabia recently, as two major companies (Masdar and EDF Energies) bid 1.3 pence per kWh for solar energy. (It must be said that these bids are government subsidised, with regular bids normally falling around the 3 pence per kWh range). The cheapest fossil fuel for a new build would be natural gas, which comes in at 3.6 pence per kWh, meaning that solar is becoming the most economically favourable option and that there is little reason to avoid its implementation.

It’s Not Always Sunny

The global solar industry has gone through a turbulent few years, with legislation both promoting and hindering progress. The 2016 earnings reports from SunPower are a perfect example of this unpredictability: the company had forecast $50m in profits but went on to report losses of $175m. Such wildly inaccurate projections result in an exodus away from solar stocks, with short-term investors instead preferring to wait for some solid proof of success.

The motivating factor behind investing in solar has always been that the cost of generation will come down until the point at which it will be too cheap to ignore. Although it seems the world is nearing this point, this has been the case for a long time and investors are restless. Nevertheless, the solar industry continues to achieve record growth rates year on year. This, surely, cannot be ignored much longer and should soon begin to reassure investors, thereby enabling them to show more faith the in the solar market.

Valuations Are Very Low

Tax credits have been and will continue to be a crucial part of renewable energy adoption. However, they have also been a large part of the recent decline in solar stock prices. On the other hand, tax credits are most heavily associated with the US; in fact, it’s the rest of the world that’s really ramping up solar adoption, as shown in the chart below.

This is noteworthy because it allows the big players in the game to spread their customer base to new countries and increase market share, which will continue to help drive down costs. Meanwhile, the weaker competition has become unable to keep up with the changing and dynamic levels of innovation, leaving more market share up for grabs for the leaders. A lot of large solar companies including SunPower, Canadian Solar, and JinkoSolar are all trading lower than they should be. First Solar is leading the way, trading higher than the rest and close to its 52-week high.

Furthermore, the industry leaders are clearly maturing in a global context, which has reduced the number of young, naïve companies in the industry – a previously off-putting factor about the industry. There has been a bit of a free-for-all for the solar sectors market share with companies riding the huge wave of growth but it now seems that a handful of major players – such as Trina Solar, JA Solar and SolarCity – are emerging. With their decade-long head start, these companies sit in a position of absolute power, as they hold important intellectual property and logistical know-how of the global market.

Given the signs that the solar industry is maturing,  the time to invest is definitely nearing and could even be here already.

Conclusion

It’s widely understood that the market has not reacted to all of the changes and adversity that the industry has endured recently and has, therefore, left solar stocks underestimated and undervalued. The future is indeed bright for the industry and it looks even brighter for the stocks, given how cheap – and therefore attractive to both long and short-term investors – they presently are.

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