Why The Solar Sector Recovery Is No Bubble


Bloomberg recently reported that solar company stocks are rebounding at a faster rate than technology stocks did after the dot-com bust of the early 2000s. The BI Global Large Solar Energy Index, which consists of 15 publicly traded solar companies worldwide, decreased 87% from a February 2011 peak through November 2012 and then regained 55% of its value by October of this year.

That is a faster comeback than the NASDAQ Composite, the stock index that tracks the performance of technology and other growth companies. According to Bloomberg data, the NASDAQ Composite Index reached a low in October 2002, then regained 37% of its March 2000 peak value in the next year.

Industry analysts say the comparison between solar and technology businesses is an interesting one, but can one really draw parallels between Pets.com, GovWorks and Webvan on the one hand, and SunPower Corp., JinkoSolar and Trina Solar on the other? While many of the Web-based companies famously went out of business, some experts maintain that solar is following a different fate.
‘I think the big difference between these companies and the dot-coms is that these companies have real revenues and real physical assets underlying their valuation,’ says Jenny Chase, lead solar analyst for Bloomberg New Energy Finance. ‘Although not profitable and with the potential to go bankrupt, they were always real companies with a comprehensible business model. Consequently, now the market is starting to recover, and fears about bankruptcy are receding, and investor interest is picking up fast.’

Other analysts say the solar business has very little in common with tech stocks of the past.

‘They are different industries by nature, regardless of how the stocks act,’ says Matt Feinstein, senior analyst with Lux Research. ‘Solar is a heavy manufacturing industry, and dot-com was not.’

When certain technology companies failed, the founders blamed a lack of venture capital. Executives in other industries do that, too, Feinstein says, but funding is not the problem for solar. Solar stocks do fluctuate, but those issues are more due to the price of modules than to venture capital funding.

‘Venture capital has really left cleantech in a way,’ he says. ‘There is a lot of searching for other sources of funding now.’

Solar and dot-coms use different business models, says Ash Sharma, senior director for solar research at IHS Technology.

‘Many of the companies affected by the dot-com boom-bust were not making any money and were driven by speculation of a future profitable business model,’ he says. ‘Whilst several PV companies have not been making money in recent years, many of them have been very profitable ventures.’

Sharma adds that the solar business is more varied. In addition to manufacturers, there are also developers, utilities and materials companies, and many are industrial conglomerates, not start-ups. Also, the dot-com crash was coupled with other events such as the post-9/11 financial crisis.

‘It had a much bigger impact on the U.S. and global economy as IT was so much bigger than solar is today,’ Sharma says. ‘Solar is perhaps recovering quicker because it is a much smaller industry in comparison and government stimulus can have a bigger and more immediate impact.’

The government incentives did play a role in the solar success and slowdown, says Roberta Gamble, research director for Frost & Sullivan's energy and environment practice.

‘The boom was driven by a combination of strong government mandates and incentives on the demand side and declining prices on the supply side,’ Gamble says. ‘Bust came when those incentives began to pull back due to the global economic downturn, and inventories began to pile up.’

The Bloomberg report highlights solar companies such as SunPower Corp., whose stock price had a one-year return of nearly 600% (as of early November); Yingli Green Energy Holding Co. Ltd., with a return of nearly 300%; Canadian Solar Inc., with a return of more than 900%; and Trina Solar, up more than 300%. Other stocks include JinkoSolar Holding Co. Ltd., up 600%; First Solar, up 146%; and SunEdison, up 500%.

Of course, as they say in the biz: Past performance is not a guarantee of future results. Nevertheless, analysts are optimistic.

‘We expect the continued growth trend, though China may continue to see market consolidation in its suppliers if European countries do not revive some of their incentives,’ Gamble says. ‘There is pretty good opportunity outside of these regions and in emerging countries, as well as in China's domestic market. I'd expect that recovery could happen pretty readily based on these factors.’

Sharma says the outlook is positive, especially for companies that can become leaner and smarter. ‘Overall we expect the PV industry to continue growing at a double-digit rate in volume and single-digit revenue growth, with modest net profitability throughout the supply chain,’ he says.

Feinstein expects the solar market to recover over the next year, and 2015 will be the turning point. ‘That's when oversupply will get back to reasonable supply, and module margins will rise back above 10 percent,’ he says. ‘We see prices stabilize, and we think over time, they will incrementally reduce due to efficiency. The outlook is good.’

Nora Caley is a freelance writer based in Denver.

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