First Solar, Inc. (FSLR), Suntech Power Holdings Co., Ltd. (ADR) (STP): Is Solar a Speculator’s Paradise?

Sadly, not all of the company’s fundamentals are as rosy. First Solar, Inc. (NASDAQ:FSLR) uses thin film technology, which offers a lower efficiency than other technologies. The firm’s cost per watt does not offer an advantage over Chinese firms. In the long run, it looks quite possible that competitors could catch up and eat away a large portion of First Solar, Inc. (NASDAQ:FSLR)‘s market share. The company needs to be examined with a degree of caution.

A higher-quality solar investment

SolarCity Corp (NASDAQ:SCTY) is a different animal. The company installs panels and leases them back to consumers, or offers electricity at a fixed kilowatt rate. This business model is fundamentally less volatile than the previously mentioned manufacturers. SolarCity’s financing costs and contract rates can be fixed to give the firm more stable margins.

This firm’s total debt-to-equity ratio of 2.15 appears high when compared to many manufacturers, but it should not cause alarm. The differences in the firm’s business models mean that SolarCity is better suited to take on debt.

With a price-to-book ratio of 8.77, the company’s trading at high industry valuations. Still, it doesn’t make the firm a poor investment. It recently IPO’d and is quite speculative, but it’s a great company to watch as it moves closer to profitability.

Conclusion

The solar industry is very volatile, and the recent default of Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP) is a warning against frivolous investing. Speculators love volatile stocks, and the firm’s high debt load makes it a great target. Volatile prices made it only a matter of time before Suntech Power Holdings Co., Ltd. (ADR) (NYSE:STP) would fall.

First Solar, Inc. (NASDAQ:FSLR) is doing well for the time being, but the improvement in its competitors’ cost structure and efficiencies are causes for concern. It has been able to weather the downturn due to large projects, but its falling cost advantage spells trouble for the next downturn.

SolarCity is a very promising investment whose leasing model will help to create relatively stable cash flow. SolarCity holds the most potential because unlike manufacturers, it benefits from volatile and falling panel prices. It is best to hold off investing until SolarCity becomes profitable, but right now, it is a good company to keep a close eye on.

The article Is Solar a Speculator’s Paradise? originally appeared on Fool.com and is written by Joshua Bondy.

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