The market cap of all of the publicly listed clean energy and cleantech companies is about $142 billion today, or roughly about the same as pharmaceutical giant Pfizer, says David Dolezal, the Managing Director for cleantech for the Americas, at UBS Securities. That market cap is also a decrease of about two thirds from a market cap of $475 billion for publicly listed cleantech companies back in 2007.
Dolezal’s comments, which he made at a clean power financing conference last week, are particularly troubling in the context that the U.S. federal government will likely be spending less money on supporting clean power going forward, and some venture capitalists have also started to move away from investing in the sector. And then there’s the solar company struggles — it emerged last week that the fourth solar company in recent months has declared bankruptcy (Stirling Energy Systems), and the Solyndra problem still continues to make news cycles.
So, the important questions are: why did this happen in the public markets and will the valuations go up?
Dolaznick says that the multiples that investors are willing to pay for cleantech company revenues and earnings have declined dramatically. While cleantech companies’ multiples have compressed by over 50 percent, the S&P 500’s have compressed by 15 percent.
The two obvious reasons, he says, are: the cleantech space requires capital spending, and capital is harder to come by right now. Another is regulatory uncertainty, and it’s unclear how the U.S. government will support cleantech in the future.
The less obvious reasons are: there’s a lot less institutional sponsorship from the public investment community in cleantech, says Dolaznick — “The names of the funds that are in our 401-Ks, are probably not investors in cleantech stocks.” There’s probably 25 funds trading these stocks, and most of those are hedge funds that have the ability to bet on and against these stocks, says Dolaznick. The group is really small. The second issue is that returns on capital frankly haven’t been great and don’t compare very well to the overall S&P 500, says Dolaznick.
The good news:
“We think this sector is undervalued,” says Dolaznick, pointing out that there have been similar valuation cycles in high growth industries. The sector was over valued in 2007, and is being under valued today. It’s being undervalued today to the extent that Dolaznick called it “the trough of disillusionment.” Ultimately he thinks that valuations will recover and that the sector will reach a point of stability.
Because the sector is undervalued, he thinks that it’s a good time to be an acquirer — these acquisitions are cheap now and potential acquirers are noticing (see the positive data on cleantech M&A). It’s certainly an interesting time right now over the next 12 to 18 month.
Image courtesy of wadem.