I had recently written about how 2013 has been an extremely exciting year for investors in the solar industry, as we have seen Photovoltaic (PV) installations increase tremendously and more and more Americans warm to using solar power. As the solar industry continued to boom, solar stocks naturally had a strong run upwards, especially after First Solar (FSLR) announced very bullish 2013 forecasts. However, FSLR has now retraced a little, and it's worth looking into why.
FSLR suffered a drop on Tuesday May 7 of around 9% after reporting its Q1 2013 results of revenue of $755 million, a decrease of $320 million from Q4 2012. The decrease in revenue was attributed to lower revenue from FSLR's Topaz project in California, construction delays with the AVSR project, and lower manufacturing utilization (which had been previously planned as FSLR planned to upgrade production lines). It is generally expected that Q2 2013 results will be stronger, and FSLR management still appears confident that their previous bullish forecasts for the full year of 2013 will be met.
Overall, despite its slight drop in share price, I would not regard FSLR's recent results as particularly disappointing or unexpected. On first glance it may look like a severe decrease for earnings to decline by $320 million from the previous quarter, but Q4 2012 was something of an outlier, and earnings were still well up year-over-year. $755 million in revenue was actually better than the analysts prediction of $726 million, and it is only in their profit per share (69 cents instead of the expected profit per share of 75 cents) where FSLR fell short. The real test will be in Q2 2013 and future quarters to see if FSLR can meet its bullish forecasts.
A look at the past performance of FSLR shows that it has been a volatile stock over the years, and its drop upon announcing its Q1 2013 earnings was still not particularly large, especially considering how it was trading below $30 in early April. The general consensus among analysts appears to be that FSLR is still slightly overextended, and it generally is not being recommended as a buy at its current levels. FSLR has made forecasts all the way to 2015 (though their forecasts there for earnings per share of $4 to $6 leave a wide margin), and if the forecasts are met, it will have proved to be a smart investment.
The main competitor to FSLR and the second highest American solar stock by market cap, SPWR had strong Q1 2013 earnings and now trades at its 52 week highs (though unlike FSLR, it is not profitable). Revenue increased substantially from America (as to be expected), and SPWR also saw a surge in demand from Japan. During Q1 2013 SPWR released its new X-series panel (with world record efficiency of 21.5%), commenced construction of its 579 MW Antelope Valley Solar project, and began to complete the construction of its California Valley Solar Ranch project. These new projects are expected to add around $3.5 billion in revenue between 2013 and 2016. For those confident in the continued growth of the solar industry, it would seem that SPWR is a reasonable investment, as I believe it has very reasonable chances of achieving profitability in future.
SCTY will release their Q1 2013 results on May 13. While the stock has not announced any truly meaningful news recently, it dropped substantially on May 7, presumably due to a downgrade from Goldman Sacks (GS) from buy to neutral (currently there is a $23 price target on SCTY). Analysts at Needham & Company also adjusted their rating for SCTY on May 7 from buy to hold, and give a price target of $18. It would appear that these analyst upgrades had an effect on SCTY's stock price.
City's past Q4 2012 earnings were not particularly impressive, and the stock dropped a little on March 6 when they were announced. However, since then the stock has risen substantially, not due to any particularly company-specific news but rather because the solar industry has been extremely strong over the past couple of months (as the saying goes, a rising tide lifts all boats). SCTY is one of the main American-based solar stocks behind FSLR and SPWR, and although it holds substantial assets, it is not certain whether it will achieve profitability in the near future.
Other Solar Stocks
There are numerous Chinese-based solar stocks such as Yingli Green (YGE), Trina Solar (TSL) and Suntech (STP) which have followed a slightly different path to American solar stocks, as they were stronger in early 2013 and have now declined (TSL is currently the strongest while STP has lost over two thirds of its value since early 2013). Recently the European Commission has agreed to impose punitive import duties on solar panels from China, which will have a further negative effect on Chinese solar stocks. In my view, Chinese solar stocks carry more risk than the main American solar stocks, and do not represent ideal investments.
Is The Solar Industry Still Strong?
While the industry leader FSLR hit a small setback upon releasing its Q1 2013 results, I believe the bullish outlook for the American solar industry is still valid, and I expect the 3 main American solar stocks (FSLR, SPWR and SCTY) to continue performing well throughout the rest of 2013.