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The growth of solar power has many investors seeking profits but those profits have proven elusive.

The two major ETFs covering the space, the Claymore/MAC Global Solar Index (NYSEARCA:TAN) and Market Vectors Solar Energy (NYSEARCA:KWT) have both lost money over the last year. The biggest suppliers remain Chinese – Suntech (NYSE:STP), JA Solar (NASDAQ:JASO), and Canadian Solar among them.

The reason is basic. Solar companies have to invest ahead of demand or they can't keep up. Investing ahead of demand means you're not making money. Companies that don't make money are the realm of venture capitalists, not stock investors.

So while buyers applaud falling prices, suppliers fear them, and margins remain under constant threat. Until companies show they can stay ahead of the price drops they remain very vulnerable.

Even today's news from iSuppli, indicating that providers will be making solid margins at silicon panel prices of 79 cents per watt in three years, has not cheered investors.

But at the bottom of the iSuppli news release is this ray of sunshine:

Though many vertical operations will continue to thrive, the space likely will find increased competition from another breed of player—the so-called specialists that will be able to aggressively invest in just one area, and more important, hold their own against their vertically integrated rivals.

That means technology specialists like First Solar (NASDAQ:FSLR), which specializes in thin film cadmium telluride, should have a bright future, at the right price, assuming it can keep scaling and keep improving its efficiency. It means the vertically-integrated Chinese rivals may not perform as well.

Despite all the hype involving solar energy, it is still at the very start of the s-shaped demand curve. That is, it's the realm of hobbyists and enthusiasts, in both the consumer and business markets. When personal computing had this kind of buyer profile, in the early 1970s, it wasn't an investment play either.

But what we know now is that is going to change. When you can deliver reliable systems at under $1/watt, in multi-gigawatt quantities per year, you are under-selling oil and becoming the cheap energy. These are the same economic forces that drove semiconductors, once mass market devices (think calculators) using them started selling.

So what solar investors need, simply, is patience, in-depth knowledge, and a regular look at the IPO calendar. When companies like SolarCity start coming public, and when the retail segment starts to consolidate (retailers were among the key beneficiaries at the start of the PC boom), that will be the time to jump in.

Meanwhile, I'm going to be cheering from the sidelines and you should too.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Why Investors Are Not Seeing Solar Profits