Clouds Loom Over the Solar Industry as Challenges Pile Up

The past few months have seen a steady and precipitous drop in solar stocks with little recovery. First Solar (NASDAQ:FSLR) was the hardest hit, with a one-month loss of over 12% and reached a new 52-week low last week after disappointing earnings results. SunPower (NASDAQ:SPWRA) also released low earnings, causing its stock to fall to a little over $7 a share. LDK Solar (NYSE:LDK) and First Solar have fallen on lower guidance and investor confidence, including Merill Lynch’s sell recommendation of First Solar at the end of October. The sector’s recent drop in value has been compared to the 2008 drop in housing prices–an unwelcome comparison to say the least. Drops in price remain likely in the short term due to a variety of threats to the industry. ^[1]

See Full Analysis for SunPower Here

Movements in the Broader Market

Bullish movement has impacted the market as a whole in recent months as macroeconomic concerns pressure investors and challenge confidence in the market, but this short-term trend has little bearing on the fundamentals of individual solar stocks or the sector in general, which is now broadly undervalued. Investors will need to gain confidence in larger economic concerns, such as the threatened Euro, declining exports from China, and the Supercommittee’s failure to agree on budget cuts, before they can start investing in fundamentally strong and promising sectors like solar.

This large-scale decline in solar stocks is more indicative of investors’ fears than in changes in the solar sector, which is growing as a whole. Yet losses have been painful throughout the sector; LDK and SunPower are down over 46% over the past three months, Suntech Power is down over 55%, and First Solar is down an eye-watering 59.9%. The Dow, on the other hand, is down a little over 2%.

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Solar Challenges Pile on

One of the challenges to the solar sector is the declining cost of polysilicon, due to a massive growth in supply which is set to double in the next two years. ^[2] Cheaper polysilicon hurts manufacturers in the short term, but should also increase demand over the long term, as solar becomes a cheaper alternative to oil, coal, and natural gas. There is also the controversy about cheap solar panels from China. US solar companies have accused Chinese manufacturers of dumping cheap polysilicon on the American market, which may spark a Chinese retaliation that will threaten America’s polysilicon exports to China, which was worth $873 million last year. The threat of a trade war will benefit no one in the solar sector as it perpetuates uncertainty about the stability of the sector as a whole. ^[3]

Another issue is the alternative energy sector’s reliance on subsidies, which is threatened by austerity measures. The European Union has been the most ardent investor in solar power, so threats to the Euro are indirect threats to solar. The UK’s recent decision to cut subsidies by over 50% to its solar sector is a harbinger for the sector as a whole. With Germany struggling with EU debt and challenges to the Euro, its famous support for solar power is threatened.

The Need for Innovation and Consumer Demand

If governments are going to start cutting solar subsidies, manufacturers will need to recoup losses in profit margins by relying on technological innovation to make manufacturing cheaper and thus more profitable. Likewise, if cuts in government spending will cut government and commercial demand for solar power, the sector will increasingly rely on consumer demand, which will only recover if unemployment falls, wages recover, and confidence returns to the market both on the investor and consumer sides.

Thus the solar sector’s coupling to the broader market makes sense and we can expect solar stocks to fall harder and faster on the heels of bad news in Europe, Asia, and America. At the same time, solar energy is unstoppable, as new technologies make it a cheaper and more reliable energy source. Trade wars, European austerity, and depressed demand in America should be seen as temporary setbacks.

For now, economic scares are overshadowing technological promises in this industry. Fortunately, current threats to solar manufacturers are temporary.

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1. The Market Cheers Solar’s Earnings Flop, fool.com [↩]
2. Polysilicon Solar Cheapest Over Next 2 Years, Say Analysts, CleanTechnica [↩]
3. China Bends to U.S. Complaint on Solar Panels but Plans Retaliation, NY Times [↩]