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What Lies Ahead For First Solar, Inc. (FSLR), SolarCity Corp (SCTY) And Solar Sector?


The solar industry had a mixed performance in 2014. Both First Solar, Inc. (NASDAQ:FSLR) and SolarCity Corp (NASDAQ:SCTY) also had a mixed year. That was basically because of supply/demand remaining modest. Pricing also started declining though it was at a manageable level. The two companies’ recent quarter results were also not all that encouraging. However, that is not the end of it. A few years ago, the industry enjoyed good margins, as well as profitability. Currently, the pricing appears to have reached a tolerable level though there is a section of analysts who still believe that the price might face downside pressures. Let’s look at some of the trends and how these two could be impacted.

Industry Demand

The current year is likely to witness 15 – 20% solar installation growth in the world. That was mainly fueled by lower prices, as well as inexpensive options of financing. Currently, China, Japan, and the United States are the top three markets for solar power and will continue to remain in the near term also. However, there are increasing signs of fresh markets emerging and set to play a bigger role. India is one among the nations that is currently promoting solar energy. This is where First Solar, Inc. (NASDAQ:FSLR) and SolarCity Corp (NASDAQ:SCTY) could possibly benefit. Pricing could play a key role and might witness a 10 – 15% drop in the current year.

Demand is likely to remain at an inflated level until next year, since consumers would like to take advantage of the 30% investment tax credit. In 2017, the incentive will drop to 10%. According to S&P Capital IQ, residential growth might exceed the commercial, as well as utility solar markets until next year. That will likely reflect in greater financing for consumers and the potential cost savings from solar power. The utility market is also a matured one and bigger in scale compared to the residential market. While the United States might see signs of overheating, China will witness growth in demand, whereas Japan will see steady demand.

First Solar, Inc. (NASDAQ:FSLR)

The company recorded a 2.5% increase in sales last year with a majority coming from the solar systems business. Analysts are expecting the company to witness 3.5% growth in sales in the current year and will accelerate to 16% next year. First Solar, Inc. (NASDAQ:FSLR) is likely to gain from a strong pipeline of its big scale system installation business. The company is also likely to bid aggressively for new projects in emerging markets such as South Africa and India in the following years. That will provide an opportunity to expand its presence since it is heavily dependent on its United States portfolio.

S&P Capital believes that the company might retain a bigger portion of its assets rather than selling projects completely, given its recent initiatives on ‘YieldCo.’ The pricing pressure will likely drag down First Solar, Inc. (NASDAQ:FSLR)’s gross margins to less than 10% until next year, compared to 24% achieved in the last year. Its quarterly miss was attributed to logistic issues, such as strike and production interruptions. That has been resolved now.

SolarCity Corp (NASDAQ:SCTY)

The company’s revenue jumped 56% last year. Analysts already expect the company to achieve 75% growth in the current year and 63% sales uptick next year. It has traditional leasing offerings to attract customers. However, the revenue part will likely be fueled by demand from its residential business segment with the focus on customer ownership. The strong commercial solar market will help the company deploy a higher volume of solar panel megawatts. However, pricing will continue to witness downside pressures resulting in weak margins. Its solar loan offerings, known as MyPower, are likely to be in good demand.

S&P Capital IQ expects SolarCity Corp (NASDAQ:SCTY) to face negative operating margins until next year. The company will focus on extending its sales force to increase its marketing, as well as hiring more installers. The company has been spending aggressively to expand its customer base. Weak selling prices are to be compensated by increased volume, as well as weak costs from energy system components.

Valuation

S&P Capital IQ has rated both First Solar, Inc. (NASDAQ:FSLR) and SolarCity Corp (NASDAQ:SCTY) shares as hold and kept a price tag of $60 each. The brokerage explained its valuation on the basis of a multiple of 1.3X its 2016 price-to-sales projection, near the peers on First Solar, Inc. (NASDAQ:FSLR). The brokerage said that a multiple near the peer is required due to its decision to establish a ‘YieldCo’ structure. The company’s geographic diversification is also limited. One of the benefits is that its greater exposure is given to high-margin projects.

In respect of SolarCity Corp (NASDAQ:SCTY), the valuation is based on price-to-sales multiple of 8.0X its next year sales per share outlook, well above its competitors. That was due to the company’s position to enjoy significant growth prospects, as well as long-term cash flow generation potential. The company’s growth prospects remain intact for the near-term. However, its execution in respect of vertical integration tactics might be a concern. Of the two stocks, First Solar suffered the most after its first quarter miss.

Conclusion

SolarCity Corp (NASDAQ:SCTY) suffered wider loss than estimated by the analysts in the second quarter. First Solar, Inc. (NASDAQ:FSLR) will announce its results on August 4. It would be better to hold on to the shares until some more favorable news emerges. First Solar shares suffered the most and might look attractive due to that. However, the results should throw some more lights to take a final call. In respect of SolarCity, it is better to wait until another quarter.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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