A Boom and Bust Cycle for Solar: Is SunPower In Trouble?

Just nine days into the new year, SunPower has already come out with what should be viewed as positive news — so why has its stock stumbled? The company has unveiled construction plans and a financing deal with GE Energy Financial Services, yet its shares have slumped 20 percent since the first trading day of 2008. But SunPower is not alone. Other solar companies, especially many of the newly public Chinese firms such as Trina Solar, Yingli Green Energy and Solarfun Power Holdings, have seen their stocks fall as well.

We’re thinking solar is about to swing into one of those boom-and-bust cycles, familiar to those in the housing or semiconductor industries, and investors should expect more volatility ahead. As in those industries, building solar cells is a big, capital intensive business and economies of scale are the primary way to make money. When demand starts to fall or there’s too much supply, it takes a while to adjust the course. It’s about time for solar to begin its adjustment.

Much as chip companies in the late 90s faced the rise of Taiwanese foundries as competitors, solar cell manufacturers have seen an influx of low-cost competition from the east. In 2007, several Chinese solar cell companies hit the American public markets. SunPower has some innovation and design expertise that can protect its margins, but first it has to get large enough to wrangle the best prices out of materials suppliers, as well as build out factories it can run at full capacity.

SunPower, with its plans for a manufacturing plant in the Philippines, is offsetting some of its costs, but it still has net profit margins over the last 12 months of only 2.5 percent. That’s pretty slim, and compared with some of the Chinese companies in this field, whose net profit margins have ranged anywhere from 6 percent to 30 percent over the last 12 months, SunPower looks overvalued. It also has little room for error in its business plan.

With planned capacity for solar manufacturers due to top 12 GW in the next year and demand estimated to range between 3GW and 5GW, there is also the real danger of too much supply. That’s good for buyers of solar cells, but bad for sellers. The latest energy bill, signed in December by President Bush, didn’t renew the solar tax credit, which means demand won’t be spurred by subsidies. Unless oil continues to rise beyond $100 a barrel, making solar energy cheap by comparison, this year may be rough for SunPower and its stockholders.

SunPower’s stock had flown higher than many of its competitors, which is why its fall in the last few days has been so dramatic — it has seen $1.6 billion erased from its market cap. SunPower may be a harbinger for a solar bust, but much like the chip industry, whose products are always in demand, solar should eventually rebound with slightly more realistic valuations.


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