Leading solar panels manufacturers such as SunPower Corporation (NASDAQ:SPWR) and First Solar, Inc. (NASDAQ:FSLR) have done very well in the past several months in the stock market. Many investors are turning towards investing in solar energy and believe these companies will eventually lead to profits with positive return on investment. Is it worth investing in solar manufacturers or other related companies to solar energy? Is high growth in solar panel usage enough to make these investments worth considering? Let’s try to answer these questions.
The solar industry is growing at a very fast pace: in 2012 the solar energy consumption in the U.S grew by nearly 34% (y-o-y) as it reached 0.212 quadrillion Btu. In 2013, the EIA projects the growth in solar consumption will grow by nearly 28% to reach 0.272 quadrillion Btu. Most of the growth in consumption will come from the electric power sector that is expected to rise by nearly 75% in 2013 (y-o-y). Furthermore, the recent rise in the prices of natural gas compared to last year will only make solar energy a cheaper substitute for electric companies. So we know this industry is projected to grow at a very fast pace. But is it profitable?
One of the reasons for the rise in consumption in solar is the ongoing drop in prices of solar panels (opens pdf): since the beginning of 2011, prices fell by more than 60%. The sharp drop in prices may have contributed to the rise in demand for solar panels but is also likely to keep solar manufacturers’ profit margins low. Let’s see how leading solar panels manufacturers have done in the first quarter of 2013:
The company invests most of its cash flow from operating activity into investing activities: in the first quarter the company spent nearly $141 million on purchasing properties, equipment and marketable securities. The company’s high investment costs are likely to keep First Solar, Inc. (NASDAQ:FSLR)’s growth in revenues. The company is also expanding its operations outside of U.S to other growing markets such as China and India. Nonetheless, its profit margin is likely to keep falling as the competition will continue to heat up. This could make this company less attractive as a long term investment.
Both companies have produced less power in the first quarter of 2013 compared to 2012. E.g. SunPower Corporation (NASDAQ:SPWR)’s production reached in the first quarter 208 Megawatts – nearly 30% drop (y-o-y). The company still has more than $0.5 billion in cash so it is capable of maintaining its operations in the coming years at these low profit margins.
Shares of MEMC Electronic Materials (NYSE:WFR) also rallied during the year (up to date) by more than 66%. This company manufactures silicon wafers for the semiconductor industry. A few years back the company also started to manufacture solar wafers. Based on its2013 projectionmost of its growth will come from its solar energy systems that are expected to rise by 10% to 28%. Its semiconductor revenues are expected to rise by only 2.4-7.8% (y-o-y). Nonetheless, the price of Solar Energy Systems is expected to fall from $3.79/w to $3.10-$3.40/w – between 10% and 18% drop. This drop in price is likely to further pull down MEMC Electronic Materials (NYSE:WFR)’s profit margin in 2013.
I think solar power is likely to keep growing fast, which will reflect in growing revenues for leading solar panel manufacturers. But the high competition, huge investment costs and falling prices are likely to keep this sector with low profit margins. Therefore, I don’t this industry won’t lead to a positive return on investment.
The article Is it Worth Investing in Solar Energy? originally appeared on Fool.com and is written by Lior Cohen.
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