90% Of Green Stocks Will Go Bankrupt - So What?

Includes: FSLR
by: Dana Blankenhorn

Robert Wagner has written one of the most intriguing articles I've seen here at Seeking Alpha, titled "90% Of Green Stocks Will Go Bankrupt ... So Buy The Sector?" He's right -- 90% of green stocks will go bankrupt. But this is true in every area of technology, and always has been.

Only one computer company from the 1950s remains a player in the space: IBM (NYSE:IBM). (Honeywell (NYSE:HON) is in other businesses and Unisys (NYSE:UIS) is not a mainstream player.) Only two companies from the 1970s PC revolution are still in the game -- Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT). The vast majority of competitors for both of these companies went bankrupt, many of them quite long ago.

The same, by the way, is true in the Internet sector. Excite, Lycos, Netscape, and CMGI were once highflyers, and they're now all as dead as Pets.com. Google (NASDAQ:GOOG) wasn't even public when the sector crashed at the turn of the century, and if you held Amazon.com (NASDAQ:AMZN) you took a wild ride downward before it came back.

It's just the way technology proceeds. A new opportunity is found, a bunch of folks go after it, a few rise to the top of the heap, the big boys come in, and consolidation occurs. Maybe one company in 10 makes it through this gauntlet. So don't invest in technology?

These are the odds that venture capitalists deal with every day. They know that most of the companies the best companies take on will fail. Maybe two in 10 will do OK and make back what was invested, after a lot of work. They live for that one in 10 shot, the long-odds winner that makes it all worthwhile.

The oil patch used to be this way, too. Back in the 1930s, there were tons and tons of oil exploration firms. Most wells were dry holes. A few broke even. Maybe one in 10 was a "gusher," a large field that would make the driller's fortune. The reason we celebrated successful oilmen from that era is because they defied those odds. Most failed. There is no license to print money in any new field.

Green technology is subject to sudden disruption. Step changes in efficiency, new business models, cost breakthroughs, and new niches are happening every day. Most companies come to market with one idea they hope is good. It's questionable whether they will gain traction before the money runs out. Once they do gain traction, their lead is subject to being upended by competitors, by new entrants, by the economics of glut and shortage oilmen know so well.

This is especially true in market sweet spots. But the amount of renewable energy being produced keeps going up, in every sector, maybe 50% per year. It will continue to do so because the economics remain favorable. California has just joined the parade of places where it's cheaper to build solar capacity than to buy electricity from the grid, so now is when Wagner tells us to abandon the space? Maybe he wants us to buy buggy whips.

Right now there's a market sweet spot in energy storage. If you have a new, scaled battery technology -- or any related solution for storing and holding grid energy so that what gets delivered to a factory is more uniform in quality -- you can make money. Companies like Beacon Power and A123 seized this opportunity -- and lost. So what, that means there was no opportunity?

Gradually, leaders emerge in every sector. First Solar (NASDAQ:FSLR) caught on to the idea that building and selling solar projects is the place to be last year, so now it looks like a good bet -- it has doubled over the last year. Their Cadmium-Telluride panels are now being produced with efficiencies to 16.1%. But there are technologies being announced every day that put that figure in the shade, and if one of those can scale they might take the market away. Or First Solar might then have the strength to acquire them.

That's just the way technology investing works. You need competitive technology, competitive prices, and a compelling business model to succeed. And long-term success is never guaranteed. But where would you rather be -- in an industry where supplies are growing 50% a year and costs are declining, or in one whose costs are growing?

Disclosure: I am long AAPL, GOOG, IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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