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Solar problems?

July 6th, 2008 · 1 Comment

There is no question that the manically depressed solar sector does suffer from another depressed bout of sell-off. But this time, is there any substance behind it? 

If you read a lot of stuff about the solar sector, you’ll come across the following arguments for a sell-off:

  1. They are overvalued.
  2. They are a high-risk sector, in a general market sell-off, high-risk stocks are the first to tumble
  3. They cannot compete on their own feet and are almost completely dependent on government subsidies and incentive programs
  4. In those that depend on polysilicon as the main input, there are strong barriers to entry because of it’s scarcity. These barriers to entry won’t last, polysilicon will become plentiful, at which point those barriers to entry will largely disappear and the solar sector will be swamped by new entries, leading to some sort of price war, and strongly reduced margins and profits.

If anyone has found another explanation we would like to know about it.

Now, let’s discuss the merits of these explanations.

1) It’s for sure at least some of the solar plays command lofty, even very lofty valuations. But by no means all of them (which is one reason why TSL is our favourite). And it’s certainly not the case that the most highly valued have crashed the most. So this does not seem to be a major part of the explanation of the sell-off.

2) We have argued before about this. We disagree that it is a high-risk sector, we can repeat that ad nauseam, perception is everything, and apparently it is PERCEIVED as such. Hence the sell-off is broadly based. Few, if any escape. This erroneous perception plays a big role in the sell-off, we feel.

3) True. But we think the trend is towards more administrative incentives, not less. Wait what happens if Obama gets elected. China is screaming for clean sources of energy. Germany and Spain (solar’s main markets) are a source of envy.

4) Yes, at some point, the scarcity in polisylicon, the main input in the most common form of solar cell technology, will not be scarce anymore and it’s price will tumble. We wrote about that earlier, here and here.

If you reread that stuff you will also appreciate that the tumbling cost of polysilicon will make solar energy much more competitive, and thereby boost demand (there is another big market to be tapped, that of utilities, the electricity producers).

So, yes, there might very well be a host of new entrants (we read almost daily on companies with either greenfield plans or expansion plans, it is already happening). However, the market for solar is still very small. All projections we’ve seen (company or industry) point to very significant growth rates (our favourite play, TSL is going to double again this year, for instance).

And plentyful polysilicon also means that the companies whose technologies depend on the supply will be able to compete much better against the thin film producers (which are actually the companies with some of the highest valuations around. It’s too early to short FSLR, but keep this trading strategy in mind when the polysilicon glut is arriving).

Normally, we would leave it like this, write a conclusion, and that would be it. However, we came across the following article:

Fuji Keizai Co Ltd, a Japanese market research firm, released the results of a survey on the market for energy-related systems in Japan. According to the survey, the solar cell system market in Japan will shrink in the future. Solar cell-related sales in Japan in fiscal 2007 (April 2007- March 2008) is ¥148.7 billion ($1,392 million). But this will drop to ¥114.3 billion in fiscal 2016. Fuji Keizai forecasts that the market will shrink in terms of value because (1) the average system price is on a declining trend due to the expanding market for silicon-free and reduced-silicon solar cells and (2) the price competition is intensifying due to sluggish growth in demand for residential systems. As far as organic solar cells are concerned, the sales in fiscal 2016 in Japan is expected to grow to ¥5.5 billion, approximately 2.4 times higher than that in fiscal 2008. The company estimates that the volume growth will remain flat because an increase in sales of such non-silicon products is anticipated.

Arguably, predicting sales to decimal figures for 2016 is a rather bold move which one is forced to take with a pich (or two) of salt. But we didn’t like that phrase “due to sluggish growth in demand for residential systems”.

This is the first prediction of its kind which we’ve come across. Although it doesn’t fit in with any other forward look and it’s limited to one (albeit rather important) country,  we have to take it seriously nevertheless. Note as well that the artcle assume the thin film and organic solars to win the competition against the players who’se technologies depend on generous dollups of polysilicon.

With a predicted price crash in that stuff, we wonder how they are so sure about that (we hold an almost diametrically opposite view). But we thought we let you know nevertheless.

Tags: Economics of stock analysis · Solar sector

1 response so far ↓

  • 1 Solar problems? II // Jul 7, 2008 at 5:36 pm

    […] sell-off in the solar sector. We couldn’t find any negative fundamental news, apart from a lone prediction that solar energy was about to shrink in one of the more important markets, Japan. However, there […]