When stocks rise at exponentially, their valuations could be stretched beyond a level justified by their future growth. SolarCity (SCTY) rose 153% in the quarter, while First Solar (FSLR) rose 47%. An analyst at Raymond James warned that a June, 2013 lockup expiration in shares of SolarCity could hurt its shares. Credit Suisse also downgraded shares, though the firm raised the target price from $22 to $28.
By comparison, Trina Solar (TSL) shares are flat in in the 1-year period:
When the shares are unlocked, the float will increase by between 8 and 10 times. This will alleviate the current short squeeze on shares. The dilution effect does not always happen. When the lockup expiration in Facebook (FB) ended, insiders at the company decided collectively to not sell shares, helping Facebook rise after the lockup period.
Fundamentally, investment interest in SolarCity is strong, which is in turn is helping the company get financing. On May 16, 2013, the company, with the help of Goldman Sachs, said it would offer more than $500 million in lease financing for both commercial and residential solar projects. This will cover 110 megawatts worth of projects. The deal raises confidence for investors that SolarCity may improve sales of panels in the United States.
The loans work by letting homeowners pay for the panels monthly. It also helps owners claim a federal tax credit that is worth 30% of the value of the solar installation.
Quarterly Sales Comparison
The powerful rally in many solar energy plays may not follow on with a sell-off. When loans are readily available and there are tax credits to support sales, solar panel sales should be expected to rise. Companies like Trina Solar, however, may not benefit. Trina forecast first quarter shipment would be between 390-400 megawatts. The prior guidance was 420-430 megawatts. Even worse is that gross margins would be between 1% – 3%. By comparison, First Solar said during its earnings call that it aims to sustain gross margins of between 15% – 20% for its new projects. Despite weak margins for Trina, Trina is improving its balance sheet by reducing its net debt to equity. Better inventory management could also help the company return to profitability.
SunPower (SPWR) is another company whose shares are up, but this is justified as its fundamentals are improving. The company expects revenue to be $2.5 billion – $2.6 billion, and earnings of between $0.60 – $0.80 per share. The guidance is far higher than the $2.55 billion revenue and $0.64 per share consensus estimates.
Solar stocks are not attractive at current prices, as the upside is mostly priced in for the rest of the year. Despite a risk of a short-term pullback, First Solar, SolarCity, and SunPower are not in a bubble. Fundamentals are improving, and the easy debt financing for customers will drive revenue growth for these companies. Trina Solar may continue to underperform, because it will take longer for the company to improve in profitability.
Written by Chris Lau