The biggest problem with solar stocks now available for sale to the public is that they are panel producers. They're on the sell side of the transaction, not the buy side.
Until more of the U.S. market reaches grid parity - the point at which solar energy from panels becomes cheaper than buying the same energy from your local power company - the big margins will be in selling the things. The same was true for computers before the development of the PC, and with every early-stage technology.
Now the first "buy side" IPO is being prepared, from SolarCity (SCTY). Brokers don't know how to price it. Analysts are talking it down, comparing it to First Solar (FSLR), which remains depressed even after a recent rally. Talking something down is a good way to create an up-side surprise. I get worried when brokers are talking a deal up, as with Facebook. (FB)
Our Jim Basanese recently offered 10 reasons this IPO is going nowhere, first comparing it to subprime loans and later to failed social companies like Zynga (ZNGA). Martin Lamonica calls SolarCity "business model innovation" selling a "mature technology."
This is not a mature technology. Today's solar panels are nothing like those you'll see in five years. I wonder whether those will even be panels.
Looking at the SolarCity S-1 I see a different picture. The company delivered almost 50% more deals in the first half of 2012 than in all of 2011. Revenues for the first half of the year were 3 ½ times those from the same period a year ago. The company has a functional business model for a product whose costs are decreasing.
SolarCity is on the correct side of solar energy transactions. The problems of panel producers are its advantages, because they reduce its cost of goods. The gating factor on the company is its ability to keep doing deals. This is an early-stage market, not a late-stage one.
I have written before that demand for solar will explode with grid parity, which is expected across most of the country about four years from now. But this is a moving target - whether you're at grid parity depends on how much you're paying for grid energy now. We passed this point in Hawaii two years ago, and demand is exploding there.
We reached this point in 2012 in California, our largest potential market. The amount of subsidy solar gets pales in comparison with the subsidies given fossil fuels or nuclear, making this achievement even more remarkable. And solar power is produced where the customers are, not hundreds of miles away.
I think SolarCity can ride the wave of grid parity across the country over the next several years. It has a working business model for financing deals, and a proven track record in doing them. If you want to get in on cheap energy, this is a way to do it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.