Solar panels are like computers, or at least like computer chips.
Most are made in the same way, out of silicon wafers. Their value also degrades over time, like a pallet of PCs left in a warehouse.
This is not a bug. This is a feature. This is why solar panel keeps taking market share. It's why predictions that solar energy is going to power the future are not hyperbole, why the end of carbon is in sight, and why coal is dead.
But for solar panel makers, this can also be an inconvenient truth. That is the real lesson of the "guidance bomb" that sent SunPower (NASDAQ:SPWR) cratering and caused sharp sell-offs in other solar stocks, like First Solar (NASDAQ:FSLR) and Canadian Solar (NASDAQ:CSIQ).
Utilities, which are the biggest buyers of solar panels, have hit "pause" on their purchases lately, as they digest existing projects and adapt to the attendant storage costs. Right now there is a glut of electricity as anyone following, say, the Texas spot electricity market will tell you.
This is why Next Era Energy (NYSE:NEE) recently bought the electricity lines into Dallas, and not the generating capacity. It's why NRG Energy (NYSE:NRG) is down almost 28% since early June. It's why Peabody Coal (OTCPK:BTUUQ) is now nearly worthless, having lost 96% of its value over the last five years. It's why the price of natural gas at the Henry Hub, despite its recent run-up caused by exports and the expectation of a winter inventory build, is still 40% below where it was in early 2009, while the economy was collapsing.
As cheap as solar panels may be to produce, and as much as panel makers may push down pricing and push up capacity, they're still not going to be as price-efficient as the cheapest form of renewable energy out there, which is efficiency.
In the history of computing, we went through many periods like this, when there were temporary gluts of supply that took time (and new applications) to work off. It's why those who invested in a basket of computing stocks in the 1950s, 1960s, or even 1970s usually walked away with very little money in their pockets. Diversification in this case was for suckers. You should have put all your eggs in one basket (NYSE:IBM) and watched that basket, as Mark Twain said.
While it follows from this that you should follow the leader, First Solar, history only rhymes, it doesn't repeat. First Solar is using a non-standard technology, one that is maxing-out in terms of price-performance, and I remain suspicious that they will pull the trigger on something hot and new in time.
No, what makes sense right now, believe it or not, is Tesla (NASDAQ:TSLA), as it buys SolarCity (NASDAQ:SCTY). SolarCity has its hands on both sides of the equation, in supply and (with Tesla and batteries) in demand. Over the medium term - over the next five years - this makes great sense.
But solar investors should remember this. There are no sure things here. There weren't in computing, either. But just because computers kept getting cheaper-and-cheaper, faster-and-faster, doesn't mean they were useless or worthless. The same goes for solar, only more so.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.