After years of disappointment, bankruptcies, and controversy the market is finally signaling sunnier days ahead for the solar sector. But not all companies are created equally, and investors looking to get in the space would be wise to carefully consider the forces behind the solar revival.
According to solar investment expert John Balbach, investors can break down the solar market into "upstream and downstream" components. In the past the majority of investors went with upstream names, or those involved with manufacture of equipment. That industry has been going through a shakeout, highlighted by the bankruptcies of industry giants Suntech Power and Solyndra.
Meanwhile, there's been rapid growth for the downstream players. "The smart money today is moving downstream to those owning the financing and business models allowing solar to be deployed, especially solar on rooftops, and specifically in the residential section," says Balbach in an interview with Kapitall.
A Lesson from GE
General Electric has taught us that if you have a capital intensive business the only way to get equipment purchased is to provide cheap leasing and financing for that equipment. That's exactly what's happening in the solar business today.
Balbach highlights over 65% growth in residential solar each year adding that some analysts project it could approach 100%, a staggering statistic for any industry. "What's generating that growth is innovation in business models and financing, not technology. Allowing homeowners and business owners to put panels on their roofs with no money down has really picked up the adoption rate."
Downstream Solar Stocks
When asked if we can expect a shakeout in the downstream market similar to what we've seen in the manufacturing market, Balbach says it's unlikely. "We're in a very early downstream market. The number of US homes that have solar versus not is very small, so there's a lot of room for growth for many years to come."
Investors are becoming increasingly aware of this high growth potential and are looking for "downstream" players to trade the trend. Few names are publicly traded, but all have reaped the rewards. Here we compare the impressive 1-year performance of SolarCity (SCTY), NRG Energy (NRG) and Blackstone (BX), which acquired a controlling interest in Vivint Solar in November 2012.
Private players including Sungevity and Clean Power Finance have also contributed to this market.
Looking for other ways to play the trend? Here is a list of solar companies on the public market and an infographic that summarizes the industry and its potential:
– Rebecca Lipman, Kapitall Editor