What are the Best Solar Energy Stocks?

Interested in investing in solar energy stocks but you don’t if it’s a wise move?

How could an industry that is built on saving millions of homeowners thousands of dollars each not be a smart, successful investment?* While this statement is certainly true, as of fall 2016 stock prices for solar financing and installation companies are currently trading in the single digits. What is going on?

* Note that we are not financial advisors and this post is for entertainment purposes only!

The Solar Industry is Big Business that’s Growing Fast

Over the last 10 years, the solar industry has seen a veritable explosion, with year-over-year growth around 60% (compared to the average utility’s 13.4% annually increase in revenue from 2010-2015).  Large national solar companies that offer power purchase agreements (PPAs) and leases have been able to secure huge financing deals to cover these agreements, in which the solar companies recoup their initial investments in small monthly increments over the course of customers’ 20 year agreement.

In addition, the average price of solar panels has decreased a whopping 70% in that same time, further reducing total installation costs, leading to more and more homeowners making the decision to install solar.

Even with the huge growth and significant price drops in the industry, solar stock is currently trading at historically low levels.

Take a look at the following chart comparing the highest stock price recorded for 3 leading solar companies and the current price (all data taken from Google Finance, rounded to nearest dollar):

Let’s look at what is causing these low stock prices and what the future could look like for the solar industry.

Instability Leads to Low Stock Prices

There are a number of factors that play into solar stocks’ current value.

1. Conventional electricity sources are still cheap and plentiful. The price of oil has plummeted over the last few years to $50 per barrel in late 2016, down from $140 per barrel in 2008. In addition, natural gas, which fuel about 1/3 of all our electric plants, is plentiful and cheap due to new oil drilling techniques that produce plentiful natural gas as a byproduct. While solar is as cheap as conventional electricity generation in many states, it’s still not the case in all. In addition, the solar industry is built on federal and state tax credits and financial incentives, which allow companies to drop the price of solar to the point where it’s comparable to conventional generation. Without these financial incentives, solar would still be a costly endeavor when compared to continuing to purchase your electricity from the grid. We saw the importance of these incentives to the solar industry when, in late 2015, the national congress, at the behest of solar advocacy groups, decided to extend the 30% tax credit for solar installations, which was set to run out in 2016.
2. The solar industry is young and is still constantly shifting, leading many in the industry to refer to it as the ‘solar coaster’. Over the last 10 years, a handful of large solar companies have gone out of business or gone bankrupt, including SunEdison in 2016, which at one point the largest developer of renewable energy installations in the world that manufactured solar panels and constructed utility-scale wind and solar power plants. To add to the affair, in October 2016, the Securities and Exchange Commission just publicized an investigation into SunEdison dealings before the bankruptcy was declared. Shaky ground. The solar industry is also plagued by near-constant battles by state regulators and monopoly-like utility companies that want to remove or severely limit financial incentives that make going solar financially worthwhile. So instead of focusing on growth and maturation, the industry is sidetracked to fight ongoing legal battles, as was the case in Nevada in 2016.
3. Most, if not all, national solar companies that focus on installing PPA or leased systems continually post a financial loss each year. For example, despite revenues of $400 million in 2015, SolarCity still claims a net income of -$58.33 million. The success of the solar industry is largely due to the widespread adoption of PPAs and leases, which allow homeowners to install solar for little to no money down (which means that solar companies foot the equipment and installation bill). This loss isn’t necessarily a bad sign, as PPAs and leases rely on homeowners paying for their installation over the course of their 20 year agreement. So while solar companies provide the upfront capital to install thousands of solar systems each year, they are reimbursed over the next twenty years – similar to home loan companies. Financing solar with PPAs and leases is a business model that necessitates huge amounts of upfront capital and long agreement terms to recoup their financial investments in each solar installation. Even still, while the business model is based on long term investment, solar investors constantly seeing losses year after year can become antsy and worried about the health of the company.
4. The solar companies that offer PPAs and leases need to secure huge loans to offer these services. For example, in 2013 Sungevity raised $125 million in funding mostly through equity partners. While stock prices are low and solar companies continue to lose money, investors worry that, in the future, these solar companies will have a difficult time securing loans for more installations.

Solar Energy Industry Looking Good in the Long Term

While the short term looks relatively grim, looking into the future provides a glimmer of hope for the industry, driven largely by continually falling prices and growing market, as well as government mandates requiring a certain amount of renewable energy by a certain time frame.

The most well-known of these mandates is Hawaii, which decided that 100% of its energy must be derived from renewable sources – including residential solar- by 2045. Other states also have standards for renewable energy, known as RPSs (Renewable Portfolio Standards). New York, for example, requires 50% of all generation to come from renewable sources by 2030. With falling prices, almost guaranteed demand, and homeowner’s ever-growing love for solar, it’s difficult to not look optimistically at the industry’s future.

Find the Best Solar Energy Stocks is Another Question

The issue for anyone looking to buy solar stocks is deciding if the solar industry will still be a growing market in 10, 20, or 30 years. Going further, who can guess if the current key players in the industry will still be viable in the future?

Before you start saying that solar is here to stay, keep in mind that in the 1970s and 1980s, thermal solar hot water systems were all the rage and local governments in the western US provided large financial incentives to homeowners installing these systems. As incentives ran out though, and photovoltaic solar became more efficient and cheaper, solar thermal died a slow death.

In the future, who knows what the next big renewable energy source will be. Will be photovoltaic (PV) solar continue its growing popularity, or will it be ousted by some new, more efficient technology? If PV solar continues to grow, who knows which solar companies will be savvy enough (or lucky enough…) to exist in 20 years. The number of key players in the solar industry in the last 5 years has decreased significantly, as large national companies like SolarCity, Sungevity, and Sunrun attempt to increase profitability and reach – and decrease cost – by purchasing or merging with solar sales and installation companies and equipment manufacturers. This trend is leading to a more stable and mature, though slightly more homogenous, solar industry. It’s very reminiscent of the US automobile industry in the 1930s to 1950s, as the “Big Three” – Ford, GM, and Chevrolet – bought out or forced the closure of smaller independent companies that simply couldn’t compete.

With solar companies offering 20 year agreements for PPA and leases, it’s unlikely that they’ll cease to exist in the near future, since they’ll be continuing realizing revenue from solar systems they are installing now. However, what we don’t know is the form they’ll take in the future. If PV decreases in popularity, these companies might cease new sales and installations, focusing only on servicing and maintaining existing systems. Or they might move their focus to another renewable energy technology. What will happen in the future, and what companies are profitable, is anyone’s guess.

More:

• Investing in Solar Energy ETFs and Stocks in 2015
• Solar Energy Stocks Grow as Many Divest in Fossil Fuels